IAP.L Regulatory News (IAP)

18 Nov 2008 07:00



Interim Results for the Half Year to 30 September 2008 

London - 18 November 2008

ICAP plc (IAP.L), the world's premier interdealer broker, today announced its report for the half year ended 30 September 2008.

Highlights:

Record Group revenue, profit and earnings per share 

Group revenue rose by 22% to £764m

Electronic revenue increased by 24% to £156m and operating profit3 by 34% to £63m

Significant acquisitions and investment during the period, which have driven the development of new voice, electronic and post-trade businesses. No exceptional costs were recognised

Revenue from new businesses, started or acquired in the last 3 years, increased to 27% of Group total revenue

On an underlying basis4 revenue grew by 9% and operating profit3 by 8%

The Group's operating profit3 margin was 24% (2007: 26%), reflecting acquisitions and investment

Free cash flow5 of £75m (2007: £109m). Net debt6 of £243m (31 March 2008 : net debt £59m) after investing £129m on acquisitions 

An interim dividend of 4.7 pence per share (2007: 3.7 pence) covering the six-month period to 30 September 2008 will be paid on 20 February 2009 to shareholders on the register on 23 January 2009

Michael Spencer, Group Chief Executive Officer, said, "ICAP has continued to benefit from the generally high levels of volatility in the wholesale financial markets. As a result ICAP produced a record profit in the half year to 30 September 2008 of £174m.

Our strategy has positioned ICAP well in the current market storm and allowed the firm to further progress during the turbulent markets of the past six months. It has also placed us in a good position to take full advantage of the likely restructuring of the financial markets. Our business structure and diversity are a major source of strength; and we continue to believe that the changing environment makes this the right time to invest in the future growth of the business. There are significant opportunities to build our business by attracting high quality people and acquiring assets at attractive prices. 

Revenue in October remained strong and, although cautious, we remain confident about the outlook."

Notes

Includes operating expenses net of other income.

Profit is defined as pre-tax profit before amortisation and impairment of intangibles arising on consolidation and exceptional items.

Excludes amortisation and impairment of intangibles arising on consolidation and exceptional items.

As per note 3 and adjusted to exclude the impact of foreign exchange and acquisitions.

Free cash flow is net cash flow from operating activities after deducting capital expenditure and adding dividends received from associates and investments.

Net debt is cash and cash equivalents less long and short term borrowings and overdrafts.

There will be a briefing for analysts and investors at 09:30 GMT on Tuesday 18 November 2008 at 2 Broadgate, London EC2M 7UR. An audiocast of the presentation made to analysts at 09:30 GMT on Tuesday 18 November 2008 will be available on the web site, www.icap.com at 17:00 GMT on Tuesday 18 November 2008. It will remain on the web site for six months. A further conference call will be held at 14:30 GMT/09:30 EST for investors and analysts based in North America. For dial in details and a copy of the presentation please contact Maitland on +44 (0) 20 7379 5151.

Contacts: 

  ICAP plc

Interim management report for the half year to 30 September 2008 

Review of operations

ICAP has continued to benefit from the generally high levels of volatility in the wholesale financial markets. Having had a busy first quarter, markets quietened during the summer period, following the normal seasonal pattern - in contrast with the same period in 2007, which was unusually busy. During September, extraordinary events in financial markets again generated record trading volumes in many markets as participants reassessed their exposures and the flight to quality and liquidity resumed.

As a result ICAP produced a record profit in the half year to 30 September 2008 of £174m (2007: £161m) before taxation, amortisation and impairment of intangibles arising on consolidation and exceptional items; this represents an 8% increase over the prior year. On a statutory basis, profit before taxation was £148m for the half year ended 30 September 2008 (2007: £141m). We continue to believe that profit before taxation, amortisation and impairment of intangibles arising on consolidation and exceptional items better reflects the Group's underlying year-on-year performance. This measure is reconciled to profit before taxation on the face of the consolidated income statement.

Delivering on our strategy

We have continued to make significant progress towards consolidating our position as the leading global intermediary in the wholesale OTC markets by a clear margin. There are three components to our strategy: 

Expanding our leading voice broking business both organically and by acquisition. We continue to develop our business in the key "focus" areas of equities, credit, emerging markets and commodities. 

Growing our leading electronic broking business both in existing products and by developing new markets.

Developing our post trade businesses to provide innovative services that enable our customers to reduce their costs and increase their efficiency, return on capital and capacity to process trades.

This strategy has enabled ICAP to make significant progress during the current turbulent markets and be well positioned to take full advantage of the likely restructuring of the financial markets.

Performance during unprecedented market turbulence

Amid growing signs of macroeconomic stress we have seen increasing pressure on the financial markets leading to very high volatility in commodity, foreign exchange, interest rate, credit, equity and related markets. Banks and other firms have announced huge credit write-downs in recent months, which have accelerated the deleveraging of balance sheets, and led to emergency central bank intervention. 

Through this turmoil the over the counter ("OTC") markets proved themselves to be extremely robust. The close-out of Lehman Brother's interest rate swap and credit derivatives portfolios demonstrated how effectively these markets operate. 

We have seen very high trading volumes in many of our markets as "risky assets" have been liquidated and there has been a dramatic migration to "safe-haven assets". Steeper yield curves, the higher price of credit and continuing disruption in the money markets suggest that this period of increased activity is not yet over. In these market conditions high volume, liquid products like spot foreign exchange prosper and structured products suffer. Traders also concentrate their business in the largest, deepest and most reliable liquidity pools offered by the largest interdealer brokers.

The scale and the diversity of ICAP are key strengths of the business. Our extensive customer base is located in more than 50 countries worldwide. Our global electronic broking global network covers more than 6,000 workstations on more than 2,000 dealing floors. The business is more diversified by asset class, type of activity and customer base than any time in the past. No single customer accounts for more than 5% of our global revenue. Across all regions and businesses our net exposure on the collapse of Lehman Brothers was £3 million.

ICAP's business has not been directly affected by the difficulties experienced by some hedge funds recently.

ICAP's pure intermediary role means that we do not have the exposures or the leverage of many other financial services businesses. ICAP has low capital requirements, a strong balance sheet and strong cash flow. 

Changing markets

We believe that the credit crisis, which has now lasted well over a year, will leave a profound impression on wholesale markets and their participants.

Capital will be scarcer and more expensive. Leverage will be lower and unsecured funding will be more constrained. Market share will probably be more concentrated in the hands of the major banks and the business model of investment banks will change radically. Investors will be much less adventurous and demand for structured products will be much lower. Regulatory oversight of markets will increase.

Each of these consequences will create opportunities for ICAP. 

Lower leverage and scarcer, more expensive capital will reduce volumes in balance sheet intensive products but will increase spreads in these products and will increase the volume of derivative and off-balance sheet trading. These latter factors should work to ICAP's advantage. Increased investor demand for high volume, liquid products, which account for the overwhelming majority of our business, will also play to ICAP's strengths.

Changes in our customers' business models and retrenchment in the banking industry will also create new opportunities for an un-conflicted, independent agency broker like ICAP. We expect that consolidation of market share among fewer, larger banks will also create the conditions for further consolidation of market share among interdealer brokers. 

We were encouraged by the G20 declaration, which required immediate actions by 31 March 2009, that "Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes."

In addition the G20 pledged "to strengthen our regulatory regimes, prudential oversight, and risk management… while ensuring that regulation is efficient, does not stifle innovation, and encourages expanded trade in financial products and services."

Increased regulatory oversight and the drive for greater transparency in OTC markets will push more OTC products to central counterparty or cleared mechanisms for settlement and provide a further boost to electronic trading. These will be welcome developments for ICAP as they will reduce the overall cost of trading and thereby serve to increase trading volumes. We emphatically do not believe that OTC markets will suddenly become exchange listed.

It is probable that there will be a relatively prolonged period of very low short term interest rates and steep yield curves, which tend to make favorable trading conditions for dealers and investors. Government bond issuance will certainly rise and ICAP is the leading global bond broker.

Investing in the future growth of the business

With these and other changes in prospect, we continue to believe that this is the right time to invest in the future growth of the business. There are significant opportunities to build our business by attracting high quality people and acquiring assets at attractive prices. 

In addition to acquisitions, the Group is investing substantially in the organic build of new voice, electronic and post-trade businesses. During this half year 27% of ICAP's revenue was derived from new businesses (those acquired or started in the previous three years). 

During this period we have made significant investments, focussed on our strategic priorities. In equity derivatives we completed the acquisition of Link Asset and Securities Company Ltd. (Link) in April, doubling ICAP's market share. The integration has gone well. The development of our global cash equities agency business has also made significant progress with 34 staff hired in the UK, US and Asia; we expect this rapid growth to continue, albeit from a relatively low base. Our position in shipping and freight derivatives was strengthened by the acquisition of Capital Shipbrokers. The London Metal Exchange approved ICAP's application for Category 2 membership and we expect to begin base metal broking in December. We have recently announced the acquisition of Arkhe, a leading independent broker in Brazil, which will strengthen our position in that market. 

We continue to invest in the expansion and development of the Group's electronic systems to handle future demand generated by both manual and algorithmic trading and to add more electronic trading customers. During this half year we have spent 11% of our revenue on technology. This is a significant but essential investment to differentiate our platforms and keep pace with customer demand.

The widely anticipated expansion of central clearing for OTC derivatives products is expected to accelerate the adoption of electronic trading - particularly in credit derivatives. Already 80% of all trading in credit default swap indices and 40% of all trading of single name credit default derivatives in Europe is conducted electronically with the associated auditability, STP and cost benefits. 

The overhaul of OTC market infrastructure and the focus on liquidity and risk management will create significant opportunities and sources of revenue growth for ICAP's post trade businesses. We are investing to further develop this very important third leg to ICAP's business.

ICAP has maintained its strong cost control processes. Excluding the impact of foreign exchange, operating costs during this half year have increased by £102m with half of this increase coming from acquisitions. The remainder of the increase is due to investments in new businesses, increased IT expenditure, performance-related broker bonuses and the small provision related to the Lehman collapse. As a result of the investments, staff compensation as percentage of revenue has increased to 58% from 57% in the comparable period.

Divisional performance

Voice broking

Voice broking volumes have continued to benefit from the higher activity level created by increased volatility and continuing disruption in the money markets. In this period the combination of generally active markets, significant investments and the impact of the Lehman's provision has led to good revenue growth with unchanged underlying profits. 

There was particularly strong growth in interest rate and inflation swaps - as traders sought the most liquid safe haven markets in Europe and reacted to rising inflation concerns. 

In the Americas, the strong growth in US Treasuries led to reduced volumes in interest rate derivatives. Mortgage revenues slowed significantly as a result of the market turmoil. 

Corporate bond revenues grew as bid-ask spreads widened; credit derivatives revenues grew modestly, as demand to hedge credit spreads offset credit market turmoil, and in Europe the proportion of CDS business traded electronically increased. 

The commodities business performed well with increases in oil, gas and electricity derivatives, and was helped by the acquisition of the shipping businesses. We have seen record emissions volumes and expanded successfully into soft commodities.

Equities revenues benefited from the acquisition of Link and the investments in cash equities. However, the financial crisis adversely affected our risk arbitrage and structured equity desks.

Overall, emerging market products have performed well in difficult circumstances and against a backdrop of a very strong performance last year. We continue investing to build businesses in the emerging markets and our joint venture with CFETS-ICAP in Shanghai is performing well. 

Voice revenues per broker have increased to £268,000 for the six months. This represents an increase of 8% over the prior year. Whilst approximately half of this increase is due to the impact of foreign exchange, this is a strong performance in the context of the high levels of investment in new areas which are initially less productive.

Electronic broking 

Electronic broking has had another very successful half year with record volumes, revenue and profit. Electronic broking now represents 34% of Group operating profit¹, up from 32% in the previous financial year. Both the BrokerTec and EBS platforms have performed very well. 

Overall for the six month period ending 30 September 2008 average daily volumes in spot foreign exchange were 22% higher than the previous year. In fixed income, US Treasuries and Euro repo volumes were marginally down on the previous year and US$ repo volume was down by 11%. Electronic broking volumes of Mortgage Backed Securities declined during the summer as liquidity and volumes moved back to voice broking in slower markets.

Non-deliverable forward foreign exchange (NDF) trading was introduced on the EBS platform in February 2008. There are currently more than 100 NDF counterparties live on the platform and more than 140 prospective customers in the pipeline. There have been several new additions to the NDF product offering including four new Latin American currency pairs (Argentinean Peso, Columbian Peso, Chilean Peso & Peruvian Sol) and three new Chinese Yuan Tenors (3 month, 6 month and 1 year).

All of ICAP's post trade businesses, Reset, Traiana, and our associate TriOptima, performed strongly. ICAP's post trade revenue and profit are reported as part of electronic broking. TriOptima terminated $24.5 trillion of CDS tear-ups in the first three quarters of 2008 alone, more than 100% of entire CDS index market at 31 December 2007. Traiana's message service, Harmony, processed an average of 160,000 FX trades per day in September, an increase of almost 300% over the same month in 2007.

Information division

ICAP is the source of global market information and commentary for professionals in the international financial markets. Our market data offers real-time, end-of-day and historical market data sourced from our global interdealer trading platforms, providing authoritative and comprehensive information on global markets across a broad range of asset classes. A significant part of the revenue of ICAP's information division is drawn from the electronic broking businesses.

Geographic performance

Europe Middle East & Africa (EMEA) 

EMEA was the most profitable region with the highest operating profit margin¹. The region delivered a very good performance during the period with both voice and electronic profit growing rapidly. 

The Americas 

The relatively low profit and underlying growth figures reflect the significant investments we are making in the Americas, principally in equities and equity derivatives, credit and emerging markets.

Asia Pacific 

The main driver of revenue growth was the continued growth of RESET, one of ICAP's post trade businesses. We saw reasonable underlying revenue growth in the voice broking businesses but the market remains highly competitive and profit from voice broking was largely unchanged in the region. 

Markets

The combination of the above factors drive the following growth of ICAP's business by market segment. 

Profit / cash conversion

The Group remains a highly cash generative business. Between April 2006 and September 2008, ICAP produced total profit after tax excluding amortisation of intangibles of £488 million. Free cash flow² during the same period was £497 million.

In the six months ended September 2008, free cash flow² was £75 million (2007: £109 million). Cash generated by operations was £151 million (2007: £185 million). Operating cash flow, before improvements in working capital, increased by £26 million but was offset by the impact of the year on year timing of trade settlement (£22 million) and a short-term, working capital increase of £38 million, principally as a result of the impact on receivables of September's record trading results, movement in bonus accruals and timing of indirect tax payments. Capital expenditure in the period increased by £4 million to £23 million.

Balance sheet

At 30 September 2008, net debt³ was £243 million, up £184 million mainly as a result of the acquisition of Link. Gross debt was £694 million and included drawings of £53 million under the revolving facility to meet FICC margin calls which ensured the Group's operating units had immediate access to liquidity during the most turbulent part of the recent crisis.

Cash and cash equivalents increased during the period by £67 million to £451 million and includes the drawing to meet the liquidity requirements noted above.

In April 2008, ICAP entered into a £150 million term loan, repayable within 2 years, to finance the acquisition of Link. The Group had originally planned to refinance this facility into the bond markets; however, as these markets have remained closed, the Group has instead taken advantage of the support of its lenders to restructure the facility into an amortising term loan. The new facility, which is for £135 million, commenced on 17 November 2008 and runs to January 2011. ICAP has no refinancing requirement before 2011.

At 30 September 2008, the matched principal business resulted in the Group's balance sheet being grossed up by £44 billion (September 2007: £54 billion).

Exceptional Items and Related Party Transactions

ICAP has not recognised any exceptional items nor have any material or unusual related party transactions occurred during the period. Costs associated with the integration of Link and Capital Shipbrokers (£5 million) and collapse of Lehman Brothers (£3 million) have been included in operating profit before amortisation and impairment of intangibles arising on consolidation and exceptional items.

Dividend

In the normal course of events, ICAP's interim dividends are calculated at 30% of the previous year's full year dividend. As a result, an interim dividend of 4.7 pence per share (2007: 3.7 pence) covering the 6 month period to 30 September 2008 will be paid on 20 February 2009 to shareholders on the register on 23 January 2009.

Foreign Exchange

The impact of sterling weakening against the US dollar and the Euro was to increase profit by £7 million in the period. Should Sterling and the Euro continue to trade at $1.50/£1 and €1.20/£1 respectively, the impact on the full year would be to increase profit by £40 million compared with 2007/8. Should Sterling continue to trade at these levels, the year on year impact in 2009/10 would be an increase in operating profit of over £60 million.

Outlook

Our strategy has positioned ICAP well in the current market storm and allowed the firm to further progress during the turbulent markets of the past six months. It has also placed us in a good position to take full advantage of the likely restructuring of the financial markets. Our business structure and diversity are a major source of strength; and we continue to believe that the changing environment makes this the right time to invest in the future growth of the business. 

Revenue in October remained strong and, although cautious, we remain confident about the outlook. Average daily electronic broking volumes remained resilient during October. In the spot FX market, volumes on the EBS platform increased by 22%, compared with the previous year, to US$244 billion. Average daily volume in total fixed income products (US Treasury products, US and European repo) on the Brokertec platform was US $561 billion a day. 

We expect there to be significant consequences for wholesale markets and their participants in the aftermath of the current crisis. As discussed above, we believe many of these consequences will create interesting opportunities for ICAP to further develop its businesses. 

In the longer term our business will continue to be driven by the "mega trends" - the resolution of significant economic imbalances, the impact of demographic changes, the rising economic power of emerging markets and developments in technology - as well as by the major overhaul of market infrastructure and structural changes in the banking industry that are now inevitable. These changes in market infrastructure and in the banking industry are sources of tremendous opportunity for our growing post trade businesses and for the Group as a whole.

Current conditions make forecasting market activity during the balance of the year more difficult than usual. However, after investing significantly in the future growth of the business, profit (before tax, amortisation and impairment of intangibles arising on consolidation and exceptional items) for the financial year ending 31 March 2009 is anticipated to be ahead of the average of analysts' current forecasts#.

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Notes to editors:

About ICAP

ICAP is the world's premier voice and electronic interdealer broker and the source of global market information and commentary for professionals in the international financial markets. The Group is active in the wholesale markets in interest rates, credit, commodities, foreign exchange and equity derivatives. ICAP has an average daily transaction volume in excess of US$2.3 trillion, more than 40% of which is electronic. ICAP plc was added to the FTSE 100 Index on 30 June 2006. For more information go to www.icap.com.

Operating profit excludes amortisation and impairment of intangibles arising on consolidation and exceptional items. Underlying additionally excludes the impact of foreign exchange and acquisitions. 

Free cash flow is net cash flow from operating activities after deducting capital expenditure and adding dividends received from associates and investments.

Net debt is cash and cash equivalents less long and short term borrowings and overdrafts.

  Consolidated income statement 

Unaudited 6 months ended 30 September 2008

Consolidated income statement continued 

Unaudited 6 months ended 30 September 2007

Consolidated income statement continued 

Audited year ended 31 March 2008

Consolidated statement of recognised income and expense

Consolidated balance sheet

Consolidated cash flow statement

Notes to the financial statements

1 Basis of preparation

The half year report for the six months to 30 September 2008 does not constitute statutory financial information as defined in section 240 of the Companies Act 1985. The half year report is unaudited but has been reviewed by the auditors, PricewaterhouseCoopers LLP, and their report is set out at the end of this document. The Annual Report for the year ended 31 March 2008 has been filed with the Registrar of Companies and the auditors issued an unqualified report thereon which did not contain any statement under section 237 of the Companies Act 1985.

The half year report for the six months to 30 September 2008 has been prepared in accordance with the Disclosure and Transparency Rules (DTR) of the Financial Services Authority and with IAS34 "Interim Financial Reporting" as adopted by the European Union (EU). This half year report should be read in conjunction with the Annual Report for the year ended 31 March 2008 which was prepared in accordance with IFRS as adopted by the EU.

The preparation of the half year report requires the Group to make various estimates and assumptions when determining the carrying value of certain assets and liabilities. The significant judgements and estimates applied by the Group in this half year report have been applied on a consistent basis with the Annual Report for the year ended 31 March 2008.

The Group maintains a columnar format for the presentation of its consolidated income statement. This enables the Group to continue its practice of improving the understanding of its results by presenting profit for the year before amortisation and impairment of intangibles arising on consolidation and exceptional items. This is the profit measure used to calculate adjusted EPS and is considered to be the most appropriate as it better reflects the Group's underlying cash earnings. Profit before amortisation and impairment of intangibles arising on consolidation and exceptional items is reconciled to profit before tax on the face of the income statement.

Items which are of a non-recurring nature and material when considering both size and nature, have been disclosed separately to give a clearer presentation of the Group's results. These items are shown as "exceptional items" on the face of the income statement.

Intangible assets arising on consolidation represent goodwill and other separately identifiable intangible assets on business combinations since 1 April 2004. The amortisation of separately identifiable intangible assets and any impairment of goodwill is included in the income statement within the column 'amortisation and impairment of intangibles arising on consolidation'.

The Group has chosen to present contingent deferred consideration as a separate line item on the face of the balance sheet. This has resulted in reclassifications from trade and other payables in the comparative periods.

Accounting policies

The accounting policies followed in the half year report for the six months to 30 September 2008 are the same as those published in the Annual Report for the year ended 31 March 2008.

(a) Analysis by geographic segment

Included in revenue is £11m in respect of joint ventures (Americas £5m, EMEA £4m, Asia Pacific £2m). Included in operating profit is £3m in respect of joint ventures (Americas £1m, EMEA £1m, Asia Pacific £1m).

Included in revenue is £11m in respect of joint ventures (Americas £4m, EMEA £5m, Asia Pacific £2m). Included in operating profit is £3m in respect of joint ventures (Americas £1m, EMEA £1m, Asia Pacific £1m).

Included in revenue is £21m in respect of joint ventures (Americas £8m, EMEA £9m, Asia Pacific £4m). Included in operating profit is £5m in respect of joint ventures (Americas £2m, EMEA £2m, Asia Pacific £1m).

(b) Analysis by business segment

Revenue of £11m and operating profit of £3m in respect of joint ventures is all included in the voice division.

Revenue of £11m and operating profit of £3m in respect of joint ventures is all included in the voice division.

Revenue of £21m and operating profit of £5m in respect of joint ventures is all included in the voice division.

The Group has recognised no exceptional items during the period.

The EBS related exceptional item during the year ended 31 March 2008 represented reorganisation and rationalisation costs following the acquisition of EBS in June 2006. No further exceptional costs are expected in relation to the acquisition of EBS. 

During the year ended 31 March 2008, a sub-custodian made a post-trade settlement adjustment without notice or the Group's consent. As a result of the need to resort to litigation to recover the debt, the Group fully provided against this debt. The issue remains outstanding as at 30 September 2008.

During the year ended 31 March 2007, the Group closed a number of its futures operations. The gain that arose in the year ended 31 March 2008 was as a result of the disposal of shares and memberships included within available-for-sale assets whose disposal was restricted in the year ended 31 March 2007. This was offset by rationalisation and other costs related to the closure of these businesses. 

Other exceptional gains in the year ended 31 March 2008 arose from the disposal of exchange shares and seats together with litigation settlements in Australia and Hong Kong.

Tax charged to the income statement in the period

The UK Corporation tax rate changed from 30% to 28% on 1 April 2008.

The Group's share of profit of associates in the income statement is shown net of tax of £2m (30 September 2007 - £2m; 31 March 2008 - £3m). 

On 17 November 2008 the Board approved an interim dividend for the year ended 31 March 2009 of 4.7p per share.

The Group continues to calculate an adjusted EPS measurement ratio in the notes to the financial statements as it believes that it is the most appropriate measurement, since it better reflects the Group's underlying cash earnings.

Certain Group companies are involved as principal in the purchase and simultaneous commitment to sell securities between third parties. Such trades are complete only when both sides of the deal are settled and so the Group is exposed to risk in the event that one side of the transaction remains unsettled. Substantially all the transactions settle within a short period of time and the settlement risk is considered to be minimal. All amounts due to and payable by counterparties in respect of matched principal business are shown gross, except where a legally enforceable netting agreement exists and the asset and liability are either settled net or simultaneously. 

The gross amount of matched principal transactions included in both trade and other receivables and trade and other payables is £43,894m (September 2007 - £54,144m, March 2008 - £36,906m).

Certain Group companies are involved in collateralised stock lending transactions as an intermediary between counterparties. The gross amount of these transactions included within trade and other receivables and trade and other payables is £684m (September 2007 - £525m, March 2008 - £771m). 

Subsidiaries

The Link Asset and Securities Company Limited and subsidiaries (Link)

On 7 April 2008, the Group completed the acquisition of Link, a global equity derivatives broker for initial consideration of £135m. Consideration of £21m has also been paid for their surplus net assets. Contingent deferred consideration equal to 25% of nine times the profit after tax for the year ended 31 March 2010 of Link plus certain complementary existing businesses of the Group will be paid in June 2010; currently this is estimated to be £54m, with a net present value at acquisition of £45m. Total consideration is capped at £250m, excluding the amount paid for the surplus net assets. The fair value of the assets acquired is given below. 

The fair value adjustments include the recognition of intangible assets arising on consolidation of £110m, the majority of which is in respect of customer relationships that are being amortised over ten years and provisions of £17m. The Group considers that the fair value of £73m for the goodwill is reasonable and relates to the value of the future growth potential of the business, its liquidity, and the assembled workforce. These assets are not separately identifiable.

In the period from acquisition to 30 September 2008, the Link business was integrated with certain complementary Group businesses. It is estimated that Link contributed an additional £46m to revenue and £2m to profit before tax before amortisation of intangibles arising on consolidation and exceptional items, but after restructuring costs and the impact of the unwinding of discount on the contingent deferred consideration. If the acquisition had been completed on the first day of the financial year, the estimated revenue would have been £48m with profit before tax before amortisation of intangibles arising on consolidation and exceptional items of £3m.

Other acquisitions

The Group acquired 79% of ICAP Equities Limited (ICAP Equities) for £1m initial consideration . ICAP Equities is a newly incorporated UK company involved in the voice broking of pan-European cash equities. A put/call option arrangement exists for the Group to acquire the minority interest, the consideration for which is based on business performance. The options allow the minority to put up to one third of their equity annually from 2012 to the Group and for the Group to call the equity after 2012. 

Other acquisitions, including Escorfin SA and Moving Pictures and Television LLC, totalling £3m were made during the period. Escorfin SA is a Mexican broker of mutual funds and Moving Pictures and Television LLC is a US company involved in broking media content. 

Associates

The Group acquired a 20% stake in Blockcross Holdings LLC (Blockcross), a company incorporated in the US involved in the development of software for trading platforms, for consideration of £3m. As the Group has significant influence on the operating and financial policies of Blockcross, this investment is recognised as an associate of the Group.

Contingent deferred consideration in respect of acquisitions

A number of acquisitions made by the Group are satisfied in part by contingent deferred consideration. The Group has re-estimated the amounts due where necessary, with any corresponding adjustments being made to goodwill.

A final payment is due in respect of Reset Pte Limited (Reset) in January 2009 of £48m, which represents the estimated amount payable based on the updated profit forecast of Reset. The discount rate used in this estimate was the Group's expected borrowing rate of 6% and the net present value of the amount due as at 30 September 2008 is £47m.

A final payment for Link is due in June 2010, currently this is estimated to be £54m with a net present value as at 30 September 2008 of £48m. The vendors have the option to have a payment on account of £15m in April 2009. A discount rate of 10% has been used.

The Group currently estimates the contingent deferred consideration for the acquisition of the minority in ICAP Equities will be £10m and has recognised contingent deferred consideration with a net present value as at the date of acquisition of £6m. A discount rate of 10% has been used.

The minority shareholders of ICAP Shipping International Limited (ICAP Shipping) (formerly ICAP Hyde International Limited) have the option to put up to one-third of their holding (currently 25%) to the Group annually from April 2010. Additionally, the Group has a call option to acquire the outstanding minority from 2012. Contingent deferred consideration with an estimated net present value of £15m has been recognised as at 30 September 2008. The estimated total amount payable of £18m has been discounted at a rate of 10%. 

Final payments for the acquisition of Capital Shipbrokers Limited (part of ICAP Shipping) are due in annual instalments for three years from 2010, currently this is estimated to be £6m, with a net present value at 30 September 2008 of £5m. A discount rate of 10% has been used.

The contingent deferred consideration consists of cash only.

Intangible assets arising on consolidation

Intangible assets arising on consolidation consist of goodwill of £714m and separately identifiable intangible assets of £370m. Additions recognised during the period were £79m of goodwill and £110m of separately identifiable intangible assets. A re-estimate of the amounts due as contingent deferred consideration has added a further £14m to goodwill as at 30 September 2008. Intangible assets arising on consolidation are recognised in the currency of the underlying assets acquired and this has given rise to an exchange adjustment of £63m in the period. Amortisation of separately identifiable intangible assets of £25m has been charged during the period. No impairments of intangible assets arising on consolidation were required during the period. 

Long-term borrowings

In June 2005, the Group issued $225m of guaranteed subordinated loan notes repayable in 2015. The issue consisted of $32m floating rate notes and a further $193m of notes which had a fixed coupon of 5.84% for the first five years and LIBOR plus 1.95% thereafter. In June 2007, the Group redeemed the floating rate notes.

Short-term borrowings

In March 2008, the Group refinanced its existing £175m credit facility and $328m term loan into a new three year unsecured revolving credit facility of which £473m is available for general corporate purposes, including the financing of acquisitions, with the remaining $94m to meet margin calls arising from the Fixed Income Clearing Corporation (FICC). The short-term revolving credit facility as at 30 September 2008 of £433m (£380m and $94m) is net of capitalised fees of £2m. To take advantage of lower short-term interest rates, the amounts drawn as at 30 September 2008 were for a one month period and have been included within short-term borrowings. The facility carries a floating interest rate of LIBOR plus 0.45% with an additional 0.10% payable dependent upon the debt to earnings ratio. The weighted average effective interest rate for the period was 5.28%.

In April 2008, the Group entered into a £150m term loan with The Royal Bank of Scotland to finance the acquisition of Link. The term loan has a term of 364 days and provides ICAP with the option, exercisable by giving the lender at least 30 days' notice, to extend the facility for a further 364 days. The coupon on the loan steps up over the life of the facility. For the six months to 30 September 2008 the margin was LIBOR plus 0.75% and increases on 1 October 2008 to LIBOR plus 1.0%. The balance outstanding on the term loan as at 30 September 2008 was £150m net of capitalised fees of £nil. The weighted average effective interest rate for the period was 6.69%.

The Group had originally planned to refinance this facility into the bond markets, however, as these markets have remained closed, the Group has instead restructured the facility into an amortising term loan. The new facility, which is for £135m, commenced on 17 November 2008 and runs to 31 January 2011, with repayments of £10m after 12, 18 and 24 months. The facility is priced at LIBOR plus 3.0%, with a step-up to LIBOR plus 3.5% after 12 months.

In May 2008, the Group entered into a £75m 364 day unsecured revolving credit facility with LloydsTSB. The facility, which is committed, is available for general corporate purposes including the financing of acquisitions and carries a floating interest rate of LIBOR plus 1.0%. The facility remained undrawn throughout the period and will expire in May 2009. 

Bank overdrafts are for short-term funding, are repayable on demand and are generally repaid within a very short time period.

(a) Reconciliation of profit before tax to net cash flow from operating activities

The movement in trade and other receivables and trade and other payables excludes the impact of the gross-up of matched principal trades as permitted by IAS7 "Cash Flow Statements". The gross-up has no impact on the cash flow or net assets of the Group. Excluding the impact of the gross-up, the increase in the net debtor for matched principal transactions (principally initially unsettled transactions) and deposits for securities borrowed/loaned was £22m (September 2007 - £21m, March 2008 - decrease £1m). 

(b) Net cash and cash equivalents

Net cash and cash equivalents comprise cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Net cash and cash equivalents comprise the following amounts:

Cash increased during the period by £67m to £451m and includes £53m ($94m) drawn down under the £520m unsecured revolving credit facility, which was used to ensure all business units had immediate access to funds during a period of unprecedented financial instability. The impact of exchange on US dollar cash balances and the acquisition of Link have resulted in cash held by the Group's trading subsidiaries, to support regulatory, clearing house and commercial requirements, increasing during the period by £50m to £310m. 

(a) The highly regulated nature of the Group's business means that from time to time the Group is subject to regulatory enquiries and investigations, particularly in the US. The Group is currently involved in a number of these. Some of these regulatory enquiries and investigations are broad and tend to be interdealer industry wide in nature.

In the US, the Securities and Exchange Commission ("SEC") has issued a formal order of investigation to ICAP Securities USA LLC, a wholly owned subsidiary of the Group, and other interdealer brokers in government and other fixed income securities. In addition, the SEC has issued a request for information relating to ICAP Securities USA LLC's voice mortgage desk. ICAP Securities USA LLC is co-operating with the inquiry. Although ICAP Securities USA LLC has not received notice of an intention by the SEC to bring any charges against ICAP Securities USA LLC or its executives, the potential range of penalties generally available to the SEC include, among other things, financial penalties, disgorgement, fines, actions against individuals, and injunctive and other remedial relief.

Such matters are inherently subject to many uncertainties and the Group cannot predict their outcomes. However, there are no issues which are currently expected to have a material adverse financial impact on the Group's results or net assets.

(b) In 2004, the National Australian Bank (NAB) announced that it had incurred FX option trading losses of AUD 360m. NAB subsequently alleged in correspondence sent to ICAP plc that one of ICAP's subsidiaries had helped NAB traders mask these losses. The Group does not accept any responsibility for NAB's losses, and has not received any further correspondence from NAB since October 2006.

(c) From time to time the Group is engaged in litigation on employee related and other matters. It is not possible to quantify the extent of such liabilities but they are not expected to have a material adverse effect on the Group's results or net assets. 

On 7 November 2008, the Group entered into an agreement to acquire 100% of the share capital of Arkhe Distribuidora De Títulos E Valores Mobiliários S.A. (Arkhe DTVM), a leading independent broker in Brazil, for an initial consideration of US$17m plus a further deferred element, payable three years after closing and dependent on future business performance. The agreement is subject to regulatory approvals.

The Group has no new material or unusual related party transactions during the period to 30 September 2008. The nature of the various services to some of its joint ventures and associates is similar to those for the year ended 31 March 2008. 

The basis of remuneration of key management personnel remains consistent with that disclosed in the Annual Report for the year ended 31 March 2008. The addition of a new long-term incentive share option plan is in line with other remuneration plans disclosed in the Annual Report. Full details of the scheme will be disclosed in the Annual Report for the year ending 31 March 2009. Kim Rosenkilde has been appointed to the Global Executive Management Group during the period as Chief Executive Officer of ICAP Asia Pacific. 

The principal exchange rates which affect the Group, expressed in currency per £1, are shown below:

Statement of directors' responsibilities

The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS34 as adopted by the European Union, and that the interim management report and the condensed set of financial statements herein includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8.

Principal risks

The principal risks that could impact the Group's long-term performance remain those detailed on pages 24-28 and 93-103 of the Group's 2008 Annual Report and Financial Statements, a copy of which is available on the Group's website www.icap.com. The Group Chief Executive Officer's Review and Business Review in this Half Year Report include a commentary of the principal uncertainties affecting the Group in the current market conditions. 

Changes in directors

The directors of ICAP plc are listed in the ICAP plc Annual Report for the year ended 31 March 2008. There have been no changes in directors since the Annual Report was published on 20 May 2008.

By order of the Board

Michael Spencer  Group Chief Executive Officer

Matthew Lester  Group Finance Director

18 November 2008

Independent review report to ICAP plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half year report for the six months ended 30 September 2008 which comprises the consolidated income statement, the consolidated statement of recognised income and expense, the consolidated balance sheet, the consolidated cash flow statement and the related notes. We have read the other information contained in the half year report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

Directors' responsibilities

The half year report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half year report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half year report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half year report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of half year report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half year report for the six months ended 30 September 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

PricewaterhouseCoopers LLP Chartered Accountants London  18 November 2008

Notes:

a) The maintenance and integrity of the ICAP website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial information since they were initially presented on the website.

b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.