Moody's affirms Investcorp's Ba2 ratings, outlook stable

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Moody's Investors Service has affirmed the Ba2 corporate family rating of Investcorp Bank B.S.C. (Investcorp) as well as the Ba2-PD probability of default rating.

Moody's has also affirmed the Ba2 ratings of the backed senior unsecured debt of Investcorp S.A. and Investcorp Capital Limited. The outlook on all long-term ratings has been changed to stable from negative.

RATINGS RATIONALE

Moody's affirmed the Ba2 ratings, reflecting Investcorp's strong franchise in the Gulf Cooperation Council (GCC) region as a leading alternative investment provider to Gulf investors, as well as investors in the US and Europe. Investcorp has a strong reputation and recognisable brand name in the GCC due to its thirty-year-plus track record. The ratings also reflect the company's high financial leverage and balance sheet risk related to its co-investment activities.

Moody's changed Investcorp's outlook to stable, reflecting the company's strong ability to raise and reinvest investors' money in the GCC. Despite a weakening operating environment, Investcorp investment solutions continue to appeal to very high net worth individuals looking for diversification outside of the GCC region. Investcorp's placement and fund raising activities reached $4.1 billion in FY 2017, a 68 per cent increase compared to the year before. The change of outlook to stable also reflects the company's strong profitability as well as the ongoing improvement in earnings quality due to the growth of more stable and predictable asset management fees. Moody's notes that the pre-tax income margin grew to 30 per cent in FY 2017 from 25 per cent a year ago. Investcorp's asset management fee income increased 39 per cent to $136 million thanks to asset growth in corporate investments and real estate divisions as well as fees from the alternative investments and credit management businesses. In FY 2017, Investcorp had a strong year in term of investments, realisations and fund raising. Also, with the addition of the credit management business (acquired from 3i Group plc ) opportunities for cross-selling are rising, which we expect will support revenue growth in the next couple of years.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upward rating pressure may result from: (i) reduced debt levels; (ii) further reduction in the company's investment portfolio; (iii) growth of Investcorp's clients' AUM, contributing to growth in management fees and EBITDA; and (iv) further expansion and diversification of revenue streams.

Downward rating pressure could result from a weaker financial position driven by: (i) a reversal in the trend of declining debt and on-balance sheet investment levels; (ii) a deterioration of the liquidity position,

(iii) an erosion in the company's improving capital position, (iv) a deterioration in the company's ability to raise new client capital or reinvest client capital that would substantially affect revenue generation capacity; (v) lower private equity origination and placement activities that would constrain the company's profitability; and (vi) material on-balance sheet investment losses.

LIST OF AFFECTED RATINGS

Issuer: Investcorp Bank B.S.C.

Affirmations:

Long-term Corporate Family Rating, affirmed Ba2, outlook changed to Stable from Negative

Probability of Default Rating , affirmed Ba2-PD

Outlook Action:

Outlook changed to Stable from Negative

Issuer: Investcorp Capital Limited

Affirmations:

Backed Senior Unsecured Regular Bond/Debenture , affirmed Ba2, outlook changed to Stable from Negative

Outlook Action:

Outlook changed to Stable from Negative