Investcorp's Ratings Affirmed; Outlook changed to Negative 

(MENAFN Press) 6 April 2012

Investcorp's Ratings Affirmed; Outlook changed to Negative

Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Investcorp's Long and Short-Term Foreign Currency Ratings at BBB and A2, respectively. The Bank's Financial Strength Rating of BBB was also maintained. Investcorp's ratings are supported by its diversified sources of funding, strong debt service record, solid capital base and good management. Conversely, the ratings are constrained by ongoing asset concentration risks, high exposure to investment and market risk, and renewed earnings volatility. Given the further decline in Investcorp's liquid asset holdings, combined with a sharp drop in operating and net profit in H1 FY 2012 and a continuing, challenging global operating environment, the Outlook for the ratings is revised to Negative from Stable. The Support Level 4 is maintained, reflecting the moderate likelihood of support in case of need.

Investcorp's ongoing deleveraging “ term debt and investments (notably hedge funds) continued to contract “ highlighting the scope of balance sheet initiatives undertaken by management, in response to the global financial crisis a few years earlier. However, concurrent with reduced leverage, liquid asset holdings continued to decline to a rather low level into the first half of the current, fiscal year. While liquidity is currently adequate and supports ongoing, timely fulfilment of financial obligations, a significant share of that liquidity is invested in hedge funds, whose performance came under renewed pressure in the interim period. Accordingly, a significant amount of Investcorp's liquidity remains vulnerable to possible fair value write-downs, in view of continued market volatility.

The balance sheet remains well capitalised, following the substantial increase in shareholders' funds three years earlier. That capital injection was earmarked to rebuild a capital base, negatively impacted by a sizeable net loss due to the effects of the global credit crisis. Investcorp's meaningful exposure to investment and market risk means that a solid capital base is very crucial.

While Investcorp's asset base is reasonably diversified by asset class there remain concentrations evident in the corporate investment portfolio. Profitability, which had reached a recent record level in FY 2011, fell sharply in the first half of the current fiscal year due to negative return on the hedge fund portfolio reflecting large volatility following the US and European sovereign downgrades and ongoing concern over periphery sovereign debt levels. Notwithstanding the reported improvement in industry hedge fund returns in January and February of the current year, the outlook for profitability remains challenging in the context of continued market volatility.

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 role 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 December 2011, the Bank's total assets were USD2,746mn and total capital was USD990mn. Total assets under management were USD11.6 billion.

The information sources used to prepare the credit ratings are the rated entity and public information. Capital Intelligence had access to the accounts and other relevant internal documents for the purpose of the rating, and considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. Capital Intelligence does not audit or independently verify information received during the rating process.

The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in September 1986. The ratings were last updated in March 2011.

The principal methodology used in determining the ratings is Bank Rating Methodology. The methodology and the meaning of each rating category and definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com.