OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Investcorp Bank B.S.C. (Investcorp) at 'BB' and the Viability Rating at 'bb'. The Rating Outlook remains Stable. A full list of ratings is provided at the end of this release.


The rating affirmations reflect the company's strong client franchise and high degree of brand name recognition in the Gulf, supported by its track record and long-term relationships in the region. The ratings also reflect Investcorp's solid funding and liquidity profile. In particular, the long-dated debt and secured financing for its co-investment portfolio reduces the impact of refinancing and liquidity risk inherent in Investcorp's business model of originating and syndicating alternative asset investments. At the same time, Investcorp's regulatory framework as a bank and designation as a domestic systemically important bank (D-SIB) by the Central Bank of Bahrain add additional levels of risk management, capital and liquidity requirements that other alternative investment managers are not subject to.

Rating constraints include significant, albeit reduced, balance sheet co-investments in private equity, hedge funds and real estate; increased potential earnings volatility and placement risk relative to peers, given that transactions are originated and placed with investors on a deal by deal basis as opposed to raising dedicated funds with an investment/re-investment period; and a predominantly secured funding profile.

On Sept. 23, 2015, Investcorp announced the sale of a 9.9% ownership stake in itself to a new Gulf-based institutional shareholder for an aggregate amount of $137.8 million. While the identity of the new institutional shareholder has not been publicly disclosed, Fitch views the transaction positively as it will likely provide Investcorp a strategic partnership in its key growth region as well as a potentially more stable equity base.

Proceeds from the share sale together with net earnings were used to retire $166 million of outstanding preference shares. Investcorp has now retired more than half of the preference shares raised in 2009. Given the elevated dividend rate on preference shares of L+9.75%, Fitch believes the company's fixed charge coverage ratio has improved, which could provide economic flexibility to make additional preferred share repurchases in the future, if executed at a measured pace.

The Stable Outlook reflects Fitch's view that Investcorp's liquidity, leverage and funding profile remain stable and could continue to improve over the medium term, absent a material market stress.

Investcorp's 'BB' long-term IDR is equalized with its 'bb' Viability Rating based on Fitch's view of limited likelihood of sovereign support. This is reflected in the Support Rating of '5' and the Support Rating Floor of 'No Floor'. The Support Rating of '5' reflects Fitch's view that external support cannot be relied upon. The Support Rating Floor of 'No Floor' reflects Fitch's view that there is no reasonable assumption that sovereign support will be forthcoming to Investcorp.

The affirmation of Investcorp's 'B' short-term IDR is based on the affirmation of Investcorp's long-term IDR at 'BB' and maintains the rating relationship between long-term and short-term IDRs as outlined in Fitch's Global Bank Rating Criteria.

The senior unsecured debt is equalized with Investcorp's IDR reflecting the expectation of average recovery prospects for the debt class.


Fitch believes Investcorp's ratings are likely limited to the 'BB' rating category in the near to intermediate term due to the company's business model, earnings volatility and balance sheet exposure to co-investments. The company's deal-by-deal business model could be a profitability constraint in a period of investment origination and/or placement activity weakness, while elevated co-investment exposure introduces balance sheet risk in the event of investment losses. Post-origination placement may also introduce temporary balance sheet risk if Investcorp is unable to place investments with clients.

A one-notch upgrade could be achievable if Investcorp is able to successfully increase the proportion of recurring management fee income generated from its assets under management (AUM), reduce the proportion of income based on origination, placement and performance of investments and continue to improve fixed charge coverage. This assumes that leverage and liquidity metrics continue to improve, and the recent declines in co-investment exposure are sustained.

Should Investcorp be unable to generate sufficient earnings to cover fixed charges, experience material AUM declines, and/or maintain the recent decline in co-investments, ratings could be downgraded.

The senior unsecured debt is equalized with Investcorp's IDRs and therefore, would be expected to move in tandem with any changes to Investcorp's IDRs. Although not expected by Fitch, were Investcorp to incur material additional secured debt, this could result in the unsecured debt being rated below Investcorp's IDR. Investcorp has historically utilized secured funding as a means to fund its balance sheet co-investments. Given that balance sheet co-investments are expected to remain stable, as a percent of the balance sheet, an increase in the magnitude of secured debt is not envisioned by Fitch.

Investcorp's Support Rating and Support Rating Floor are sensitive to changes in Fitch's assumptions regarding the likelihood of extraordinary sovereign support to be extended to Investcorp, which Fitch views as unlikely.

Fitch has affirmed the following ratings:

Investcorp Bank B.S.C.
--Long-term IDR at 'BB'; Outlook Stable;
--Short-term IDR at 'B';
--Viability Rating at 'bb';
--Support Rating at '5';
--Support Rating Floor at 'NF'.

Investcorp S.A.
--Long-term IDR at 'BB'; Outlook Stable;
--Short-term IDR at 'B';
--Senior unsecured debt at 'BB'.

Investcorp Capital Ltd.
--Long-term IDR at 'BB'; Outlook Stable;
--Short-term IDR at 'B';
--Senior unsecured debt at 'BB'.