TEXT-S&P summary: Intermediate Capital Group PLC

Jan 18 -

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Summary analysis -- Intermediate Capital Group PLC ---------------- 17-Jan-2013

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CREDIT RATING: BBB-/Stable/A-3 Country: United Kingdom

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Credit Rating History:

Local currency Foreign currency

01-Jun-2011 BBB-/A-3 BBB-/A-3

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Rationale

The ratings on Intermediate Capital Group PLC (ICG), a U.K.-based mid-market private equityand mezzanine finance-focused investor and fund manager, reflect Standard & Poor's RatingsServices' view of its solid business profile and adequate financial profile, which isunderpinned by what we consider to be fairly aggressive financial management, considerablecredit risk, and adequate liquidity.

ICG is one of the largest private-equity related companies in Europe and has a good trackrecord of strong relative investment performance and ability to raise funds. ICG's specialty isinvesting in mezzanine debt of private equity-sponsored leveraged middle-market companies inEurope, Asia, and the U.S., both through funds and its own balance sheet. Reported assets undermanagement (AUM) were EUR12.9 billion ($17.2 billion) at Dec. 31, 2012. We recognize thecompetitive advantage of ICG's network of established local teams to source its mezzanine andprivate equity investments in the underserved middle-market space, which in our view gives itpower over pricing and terms. ICG also manages credit funds that make investments in the seniordebt and high-yield bonds of leveraged companies.

We view credit risk as high because of its large, individual principal investments inleveraged companies. Provisions for impairment were a reported 5.7% of the portfolio on anannualized basis in the six months to Sept. 30, 2012 (broadly in line with a 5% average over theprior five years). That said, in our view it has a relatively good track record of realizingvalue on its investments and since inception in 1989 has a reported average realized return of1.6x and an internal rate of return (IRR) of 18%. We view ICG's mezzanine and private equityrisk mitigation practices of securing a Board seat and taking an active role in the managementof the companies invested to be important mitigants to its credit risk.

We consider ICG's financial management to be fairly aggressive, considering the level ofcredit risk it takes and the lumpy nature of its cash flow. We take comfort from the strongdownward trend in balance sheet leverage since the financial crisis and the strategic focus togrow fee income. By our measures, debt to adjusted tangible equity (ATE) was still quite high,in our opinion, at Sept. 30, 2012 at 0.86x. This represents a marked improvement from a peak of3.2x in 2009. We also consider that the company's debt servicing metrics are relatively low forthe rating with EBITDA excluding unrealized gains/losses and adjusted for PIK (payment-in-kindsecurities)/interest expense at 1.9x in the six months to Sept. 30, 2012 on an annualized basisby our measures. We take some comfort from the resilience of ICG's net interest margin, adjustedfor PIK, which was 1.7% in the six months to Sept. 30, 2012 on an annualized basis by ourmeasures.

We view management's efforts to grow the lower risk, fee-based funds management business asa supportive development for the ratings. Notably, ICG has recently announced the final closingof a EUR2.5 billion European mezzanine and senior equity fund. This and other fund raisinginitiatives lead us to believe that over time, the greater source of more dependable recurringrevenue could lead to more stable and supportive coverage metrics.

Outlook

The stable outlook reflects our view that ICG's asset quality and credit performance are notlikely to deteriorate materially, notwithstanding the weak economic environment in some of itschosen markets. It also reflects our expectation that ICG will continue to successfully raisefunds and that the expansion of its non-European businesses will be carefully managed. Ourratings assume that ICG will maintain gross debt below 1x adjusted tangible equity and interestcoverage (excluding unrealized gains/losses and PIK) will typically be above 3x.

We could lower the ratings if ICG's leverage or debt service metrics deteriorate below ourexpectations, if fund raising falters, or asset quality deteriorates. The ratings could also bestrained by a more aggressive growth strategy outside of its core areas of expertise. An upgradewould be predicated on a commitment to more conservative financial management, including asustained improvement in leverage, debt service metrics, and liquidity. However, we considerthis unlikely in the medium term.

Related Criteria And Research

Rating Private equity Companies' Debt And Counterparty Obligations, March 11, 2008