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Global Credit Research - 28 Oct 2010
London, 28 October 2010 -- Moody's Investors Service has today changed the outlook on 3i Group Plc's
(3i) ratings to stable from negative. 3i's senior unsecured
debt and issuer ratings of Baa1/P-2 were affirmed.
Marjan Riggi, Vice President and Senior Credit Officer at Moody's
commented on the outlook change: "The change in 3i's
outlook to stable reflects the company's shift toward a more conservative
approach to liability management by reducing its leverage and adhering
to a more recently introduced maximum net debt level." Marjan
Riggi continued: "The stabilization of the outlook also takes
into account the good track record of the company over the past two challenging
years to realize the sale of a number of investments profitably,
demonstrating a certain robustness and success of its business."
Moody's said that 3i's gearing levels have been reduced significantly,
with the value of its net debt compared to the market value of its assets
(the market value based leverage ratio) having decreased to 8%
in FY10 (ending March 31, 2010) from 53% in FY09 (though
Moody's expects some weakening from this very low level).
Furthermore, the company has publicly stated its commitment to maintain
net debt levels below GBP1billion and retain higher cash positions—noting
however that this does not represent a commitment from 3i to maintain
a leverage/gearing ratio below a certain target. Moody's
added that gearing levels have benefitted from a higher cash position
and the gradual recovery in 3i's operating environment, leading
to a revaluation of its investment portfolio from an unrealized loss of
-GBP2.4bn in FY09 to an unrealized profit from revaluations
Moody's commented that 3i continues to maintain a cautious approach
to investing (GBP386million in FY10 from GBP968million in FY09
and GBP2.2billion in FY08) to ensure future profitability of
its deal flows. While the recovery in global markets has gathered
pace, increased competition from other private equity players has
led to inflated prices on some assets reducing their value proposition
for 3i. As a result, 3i currently holds very high levels
of cash resulting in low net debt levels of GBP280million at FY10.
However, as the company continues to look for opportunities to invest,
we expect leverage levels to increase while net debt levels are expected
to remain below GBP1billion in line with 3i's publicly stated
Moody's notes that 3i's cash flow from operations continue to be negative
but have improved somewhat for FY10 (-GBP179million compared
to -GBP230million in FY09) largely as a result of cost cutting
measures and lower operating expenses. Therefore the company continues
to depend heavily upon realizations from sales of investments to service
its debt obligations. In this regard, 3i has continued to
be successful in divestments throughout the year (GBP1.4 billion
at FY10) with stronger uplifts to sale compared to last year reflected
in the recovery in the overall realized profits. Moody's considers
that the consistent generation of cash from realizations in the past two
years in diverse market conditions has demonstrated 3i's management ability
and commitment to maintaining low net debt levels and strong liquidity.
However, interest coverage multiples of 2.3 times are currently
in the Ba-range and will be challenged to improve if realizations
and operating cash flows do not improve further. This, in
our view, is a constraint on the overall rating of Baa1 for 3i.
3i has recently announced that it has reached an agreement to acquire
Mizuho Investment Management (MIM) from Mizuho Corporate bank for GBP18.3million.
MIM is an asset manager with GBP3.7billion of assets under
management and specializes in the management of funds raised to invest
in senior and subordinated corporate debt. The existing debt management
business of 3i will be merged with MIM to form a distinct 3i Debt Management
business line. With this acquisition, 3i hopes to help diversify
its earnings base in the future by augmenting its earnings from realizations
with more fund management fees. Moody's commented that the
acquisition of MIM will have no meaningful impact on the net debt profile
of 3i (GBP18.3 million cash acquisition) and believes that
going forward the acquisition of MIM could bring positive benefits in
terms of providing additional fund management fees for 3i.
The key factors underpinning Moody's current Baa1 ratings are 3i's
solid franchise in private equity deal origination, its reference-player
status which helps it to have superior access to private equity deal flows,
its tight investment decisions and asset allocation processes, as
well as the granularity of its portfolio. The company has demonstrated
proactive management of liquidity through its willingness and ability
to dispose of holdings on a regular basis. The current ratings
also incorporate 3i's commitment to maintaining its net debt levels at
below GBP1billion (net debt was at GBP280million as at FY10),
and maintaining its current level of portfolio granularity, which
is a key driver of its asset quality metrics within our methodology.
3i's ratings also take into account the volatile nature of private
equity investments and their exit realizations, low interest coverage
ratios and the uncertainty regarding whether private equity markets will
rebound to their previous levels of profitability once the global financial
markets stabilize. The stable outlook reflects the very low current
levels of gearing and market value-based leverage (9% and
8% respectively) which should withstand some of the risks stemming
from the uncertainty regarding the timing of the full recovery of 3i asset
valuations and its future profitability ratios.
Currently at this point of the economic cycle and in view of the secular
challenges in the private equity industry, a rating upgrade appears
unlikely. However, a significant change in balance sheet
structure and/or financial strategy, which could ensure that the
ratios of net debt/portfolio stay comfortably within or below the 25%-30%
range; combined with an improving net operating cash position,
which will strengthen debt service coverage parameters, may place
upwards pressure on the ratings. On the other hand, an increase
in market value based gearing beyond 35% which could be caused
by sustained deterioration in asset values with consequent limitations
on portfolio exit or realization opportunities could put downward pressure
on the rating. A relaxation in the overall management discipline,
combined with weakening financials would also be a negative factor.
Maintaining a certain level of portfolio granularity is also a key driver
in terms of asset quality metrics within our methodology framework.
Rating pressure would also rise if liquidity were to deteriorate and/or
if debt service coverage parameters worsened beyond its current level
in the Ba-range (e.g., if interest coverage
multiples according to Moody's norms will fall below 2-3
The principal methodology used in rating 3i was "Global Investment Holding
Company Methodology" published in October 2007. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
The last rating action on 3i was on May 14, 2009, when Moody's
confirmed the ratings of Baa1/P-2 and assigned a negative outlook
to the ratings.
Based in London, 3i Group Plc reported total assets under management
of GBP9,633million as of 31, March 2010.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
Moody's changes outlook on 3i's Baa1 ratings to stable from negative
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London E14 5FA
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