Capital Intelligence downgrades Investcorp

The weakness in capital markets, the decline in investment banking transaction flows and in mergers and acquisitions has also negatively affected the Middle East's leading investmnet bank, Investcorp.

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By  Massoud Derhally Published  October 22, 2001

The September 11 attacks on the United States have had a profound affect on investment banks globally. 364 US companies have issued profit warnings, and many have taken measures to minimise costs. The most recent to be affected is Merrill Lynch, which industry analysts estimate will shed some 10,000 jobs from a work force of 65,000.

The weakness in capital markets, the decline in investment banking transaction flows and in mergers and acquisitions has also negatively affected the Middle East. A leading star, Investcorp has had a tough year and to add insult to injury, Capital Intelligence, the rating agency has downgraded its rating of the Bahrain listed investment bank.

According to Capital Intelligence report, “Net income on both a six month and trailing twelve month basis, was sharply lower, and we do not expect any noted improvement to end 2001. Continuing high provision charges for investments will also impact the bottom line. In light of the above, Investcorp’s long-term foreign currency rating is downgraded to BBB+ while the short-term rating is maintained at A2. Investcorp maintains a very solid capital base and good liquidity profile. Recurring income streams, particularly from asset management, continues to perform well to date. These factors will support the Bank during this difficult period.”

While Investcorp’s total assets were up to $3.2 billion at end June 2001, managed funds amounted to US$1.7 billion, accounts receivable declined to $154mn from US$206mn. Capital Intelligence attributes the decline to the fall in subscriptions due for investments placed. In addition the report points to existing problems within the company’s investment portfolio. This includes the anticipated full write-off by Investcorp of its US$18mn exposure to by year-end 2001, a ‘collocation’ service provider for telecom companies that filed for bankruptcy protection in May 2001 An additional write-off includes Investcorp’s $29mn exposure to CityReach, a provider of Secure Internet Exchange infrastructure for internet dependent enterprises.

In the first half of 2001, Investcorp exited the William Carter Company, the largest manufacturer and marketer of children's apparel in the United States, to Berkshire Partners, a Boston-based private equity firm that manages close to $3 billion of equity capital. Investcorp acquired Carter’s in 1996 for $208 million from Wesray Capital Corporation and is selling it to Berkshire, after holding the company for four and a half years, for $405 million. The sale of that investment resulted in an annual return to investors of approximately 25% over the 4 1/2 year holding period.

“Areas that have continued to perform well include asset management. Returns continued to remain robust to end June 2001 and, as a result, assets under management increased 42% to US$1.1 billion at the mid-year point,” according to Capital Intelligence. “The current post-acquisition focus is on retail properties as tenant companies face slow growth. Also in the first half of 2001, Investcorp formally launched its fourth line of business – Technology Investing, with a US$210mn Technology Fund raised from clients and the Bank.”

Despite the downgrade by the rating agency, Investcorp’s capital adequacy remains strong with a total capital to total assets ratio of 26.5%. In May 2001, Investcorp’s capital base was strengthened through the issue of US$200mn in preference shares. The shares issued are non-cumulative, non-participating and are classified as Tier 1 capital by the BMA and rating agencies. Investcorp’s overall liquidity and funding profile remained adequate. The bank raised $775 million in new funds during the first half of 2001, closed a US$125 million private placement of 29 year notes in June 2001 and secured a $450 million five-year syndicated bank loan to finance some of its existing debts.

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