Intermediate Capital Group Outlook Revised To Stable From Positive On Increased Market Uncertainty; Affirmed At 'BBB-'

  • While a significant portion of Intermediate Capital Group's (ICG) earnings is not tied to fluctuations in the financial markets, the economic slowdown caused by COVID-19 and consequent credit pressure could weaken ICG's performance relative to our previous projections.
  • Specifically, in 2020 we could see lower fundraising than previous years, a slowdown in realizations, and lower interest and dividend income from invested companies.
  • This means ICG could take longer to enhance its coverage of recurring costs according to S&P Global Ratings calculations.
  • We are therefore revising our outlook to stable from positive and affirming our 'BBB-' ratings on ICG and its debt.
  • The stable outlook reflects our view that in the next two years ICG will operate with balance-sheet leverage of around 1.2x, and EBITDA interest coverage of 5.0x-5.5x. Its locked-up investor capital means that it is better-placed heading into the current downturn.
PARIS (S&P Global Ratings) March 27, 2020--S&P Global Ratings today revised to stable from positive its outlook on Intermediate Capital Group Plc (ICG). We affirmed our 'BBB-' long-term issuer credit rating and 'BBB-' issue rating on the senior unsecured debt.
The outlook revision to stable follows the now weakened macroeconomic environment as a result of the COVID-19 outbreak. This will probably result in lower earnings in the financial year (FY) 2021 (ending March 2021) relative to our initial projections. Consequently, we believe ICG will need more time than we initially projected to achieve S&P Global Ratings-adjusted EBITDA interest coverage above 6x and S&P Global Ratings-adjusted debt to EBITDA sustainably below 3.0x--our triggers for an upgrade.
As an alternative asset manager, ICG had third-party assets under management (AUM) of £39.9 billion and £2.7 billion of on‐balance‐sheet investments as of December 2019. Under our revised projections, we consider that income from on-balance-sheet investments may be weaker in the coming months as the slowdown intensifies. This is particularly the case for dividend income, as well as for asset realizations because we expect ICG to wait for valuations to recover before selling assets. We also think unfavorable market conditions could slow fundraising prospects for the rest of 2020, leading to slower growth in recurring management fees than previously envisaged. That said, ICG has good downside protection; recurring revenues are fairly predictable given that 85% of its fee-earning AUM is in closed-ended funds with long maturities. As of Sept. 30, 2019, ICG had achieved £1.6 billion in locked income fees (until end-March 2031), which we believe will keep increasing on the back of sustained fundraising and additional fund investments.
When assessing most asset managers we focus primarily on cash flow metrics but for ICG we first assess its balance-sheet metrics. Our revised expectation is that ICG's S&P Global Ratings-adjusted debt to adjusted total equity will increase to around 1.2x, from 0.9x at March 2019, but remain entrenched in the 0.8x-1.5x range. This will result from a reduced balance sheet given the potentially lower valuation of its investments, and from a higher gross debt level following the issuance of a €500 million bond in February 2020. On a cash flow approach, measured by S&P Global Ratings-adjusted EBITDA to adjusted debt, we expect ICG to remain leveraged at above 4.0x, from 3.8x at March 2019. We previously anticipated that deleveraging would happen while slightly growing debt would be overcompensated by ICG's additional management fees. We consider this unlikely in the next 12-18 months given the current environment.
Based on likely sources and uses of cash over the next 18‐24 months, we continue to assess ICG's liquidity profile as strong and believe that it could withstand substantially adverse market circumstances over the next 24 months while maintaining sufficient liquidity to service its obligations. This a key factor in our affirmation of the 'BBB-' rating.
ICG's debt repayments total £250 million until September 2020, and we understand that it will use the proceeds from the €500 million issuance launched in February 2020 to meet them. After September 2020, we understand the next debt is due in September 2021 for around £100 million equivalent, which will be well covered by future recurring earnings.
The stable outlook reflects our expectation that ICG's balance-sheet leverage will remain below 1.5x. We expect earnings to show resilience, thanks to locked-in management fees, although they will not be immune to the economic and market slowdown.
An upgrade in the next 12 to 24 months could follow ICG demonstrating its capacity to grow fee-paying AUM and maintain margins, enhancing its coverage of recurring costs. In particular, we would raise our ratings on ICG if its interest coverage by adjusted EBITDA increases above 6x. We expect ICG will continue investing its funds cautiously and maintaining leverage, measured by debt to ATE net of surplus cash, in the 0.8x-1.5x range.
Downward pressure could emerge if the company materially increases its financial leverage appetite or its interest coverage deteriorates significantly. We could also revise the outlook to stable if its investment performance deteriorates substantially leading long-term fundraising prospects to wane.
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