Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Investcorp’s Financial Strength Rating (FSR) at ‘BBB’ on the basis of its sound capital base, diversified sources of term funding and good debt service record. The FSR is also supported by the rebound in profitability at both the operating and net levels, and the established business franchise.
Constraining the FSR is the Bank’s relatively low balance sheet liquidity at end H1 FY2014, a large illiquid corporate investment portfolio and the challenging operating conditions, especially in Europe. The Bank’s Long- and Short-Term Foreign Currency Ratings are affirmed at ‘BBB’ and ‘A3’, respectively. Given its wholesale bank status, Investcorp does not have a formal lender of last resort in Bahrain. The Support Level of ‘4’ is maintained to denote only a moderate likelihood of support in case of need. The Outlook for all the ratings is affirmed ‘Stable’.
Investcorp’s successful deleveraging exercise (term debt and investments – notably hedge funds – continued to contract) evidences the scope of balance sheet management initiatives undertaken post-Lehman. However, concurrent with reduced leverage, liquid asset holdings have also declined. While the Bank’s accessible liquidity – including undrawn committed facilities – remains satisfactory, and expected to support ongoing timely fulfilment of financial obligations over the next five years, a moderate share of that liquidity is invested in hedge funds. As an asset class, hedge funds remain vulnerable to possible fair value write-downs in the context of potential renewed market volatility. In mitigation, these assets currently form a less significant component of Investcorp’s overall liquidity given their substantial reduction over the last five years.
The nature of Investcorp’s business model and its inherent exposure to investment and market risks means that a sound capital base is very crucial. Given the regulatory restrictions connected to being a wholesale bank, Investcorp cannot take retail deposits. Consequently, the Bank’s customer deposit base funds a rather small proportion of the asset base, while some customer deposits are transitory since they relate to subscriptions pending investment, or exit proceeds pending distribution to clients. Exposure to illiquid corporate investments has risen noticeably as a proportion to total assets in recent years, offsetting the decline in hedge funds, although single name corporate investment concentrations have improved. It is noteworthy that co-investments are now completely funded by a combination of capital and very long term debt.
The Bank’s profitability at both the operating and net levels recovered in FY13, and continued to grow at a healthy rate into H1 FY14, reflecting significantly higher fee income from strong deal acquisition and placement activity. Indeed, sustained growth in fee income evidences the improved quality of revenue streams in recent years. Although investment risk has abated somewhat, the outlook for Investcorp’s profitability remains challenging in view of possible renewed market volatility, particularly in Europe.
Investcorp was founded in 1982 and remains a management-controlled entity, with strategic partners and management effectively owning a majority of total shares. Investcorp is akin to an alternative asset manager performing the roles of principal and intermediary in international investments through operating centres in Bahrain, London and New York. Operating under a wholesale banking license issued by the Central Bank of Bahrain, the Bank pursues a highly focused approach, offering its investment products to institutional and very high net worth individual clients, both in the Arabian Gulf and internationally. Investcorp also co-invests along with customers in all the alternative asset products it offers to its clients. As at end H1 FY2014, the Bank’s total assets were $2,358m and total capital was $936m. Total client assets under management were $9.2bn.
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