Moody's Investors Service has today affirmed and changed to stable, from negative, the outlook on Investcorp Bank B.S.C.'s ( Investcorp ) Ba2 deposit rating and D standalone bank financial strength rating (BFSR), equivalent to a baseline credit assessment (BCA) of ba2. The rating action captures Investcorp's (1) balance sheet deleveraging; (2) reduced on-balance sheet risk; and (3) ongoing recovery in fee revenue. Concurrently, Moody's has affirmed and changed to stable, from negative, the outlook on the Ba2 ratings of the backed senior unsecured debt of Investcorp's wholly owned subsidiaries, Investcorp Capital Limited and Investcorp S.A. The rating agency also affirmed the (P)Ba2 rating of Investcorp Capital Limited's backed senior unsecured medium-term note (MTN) programme, all of which are guaranteed by Investcorp . Investcorp's Not-Prime short term rating was also affirmed. The primary driver for the rating action is the material deleveraging of the balance sheet of Investcorp , a licensed wholesale bank in Bahrain that provides access to (and manages) global alternative investments. Investcorp's debt levels declined to $1.2 billion as at June 2013 , from $2.6 billion as at June 2009 . As a consequence, over the same period, the company's market funding-to-tangible common equity ratio declined to around 1.7x, from 4.2x. In light of Investcorp's debt deleveraging and its successful debt refinancing over the past two years, its cash balances now exceed debt obligations maturing over the next four years. The rating action also reflects Investcorp's decision to shrink its investment portfolio, thus reducing on-balance sheet risk. Investcorp's investment portfolio declined to 1.9x shareholder equity as at end-June 2013 , from 2.9x as at June 2009 , affording the company greater flexibility to withstand adverse market developments. In addition, the company has reduced its investment concentrations, with only one corporate investment exceeding 10 per cent of shareholder equity as of June 2013 (according to company disclosures). Investcorp's balance sheet deleveraging will also lead to some reduction in earnings volatility, while for the fiscal year ended June 2013 profitability was supported by strong investment flows (both the acquisition and placement of new investments, and the disposal of existing investments) that has led to a pick-up in activity and performance fees. Moody's expects current levels of placement and exit activity to continue to support Investcorp's profitability. Despite these material improvements that contributed to the change in the rating outlook to stable, the Ba2 deposit rating also continues to reflect the limited global scale of Investcorp's operations and risks inherent in the company's business model, including fairly high, albeit declining, balance sheet exposure to private equity investments (with corporate and real estate investments accounting for around 140 per cent of Moody's adjusted tangible common equity as at June 2013 ) and the company's still volatile earnings profile. Upward rating pressure could be exerted on Investcorp's ratings by the successful and sustained execution of the company's plan to (1) further reduce its self-managed fund portfolio (by reducing its hedge fund holdings, disposing of its mature private equity portfolio investments and restricting the funds to be invested in future acquisitions), and (2) increase the volume of client assets under management. Negative rating pressure could result from a weaker financial position driven by (1) lower private equity origination and placement activities that would constrain Investcorp's profitability; (2) material investment losses; (3) an erosion in the company's improving capital base; or (4) a reversal of the trend of both decreasing debt and on-balance sheet investment levels.
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