September 30, 2016 / 5:16 PM / a year ago

Fitch Affirms ICAP at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 30 (Fitch) Fitch Ratings has affirmed UK-based ICAP Plc's (ICAP) and ICAP Group Holdings plc's (IGHP) Long- and Short-Term Issuer Default Ratings (IDRs) at 'BBB' and 'F3', respectively. The Outlooks are Stable. The ratings on the senior debt issued by ICAP and IGHP have also been affirmed. A full list of rating actions is available at the end of this rating action commentary. The rating actions have been taken in conjunction with Fitch's periodic inter-dealer brokers (IDB) peer review (see 'Fitch Reviews Inter-Dealer Brokers' on www.fitchratings.com). KEY RATING DRIVERS IDRs AND SENIOR DEBT ICAP's ratings reflect the group's strong franchise in selected electronic broking platforms, risk mitigation and regulatory reporting solutions. ICAP's BrokerTec platform is the leading electronic venue for trading on-the-run US Treasuries, while the group's foreign currency trading platform's (EBS) market share in certain foreign currency pairs has grown rapidly, notably in Chinese renminbi. The company's post-trade division is geared towards exploiting growing regulatory reporting, clearing and reconciliation requirements for OTC derivatives and has to date seen sound growth. We view ICAP's business model as being reliant on transactional and bank client revenues, which introduce an element of earnings volatility as banks' trading appetite varies with macroeconomic conditions and regulatory capital constraints. We expect the sale of the voice broking business to Tullett Prebon plc (Tullett, BBB-/Stable), which is scheduled to complete by end-2016, to result in improved revenue stability and EBITDA margins and a higher share of subscription revenues. Voice broking revenues have fallen consistently in recent years, reflecting a gradual move to electronic platforms for some products, low interest rates across maturities and subdued bank client risk appetite. The ratings also reflect our view that ICAP's leverage, as measured by gross debt-to-EBITDA, is likely to be at the upper end of the range commensurate with investment-grade ratings in the medium term. At financial year ended March 2016 (FYE16), gross debt stood at GBP664m, or 2.4x EBITDA (1.8x at FYE15). The increase was largely due to a GBP83m bank overdraft almost entirely related to timing mismatches in the settlement of matched principal transactions, and to a GBP62m loan from an associate company. Following the repayment of these obligations and of a GBP110m revolving credit facility drawing, we expect gross debt to settle in the medium term at around GBP410m. Absent a material improvement in earnings, we expect gross debt/adjusted EBITDA to remain at just under 2.5x, which we view as being at the higher end of a range appropriate for an IDB rated in the 'BBB' category. The profitability of ICAP's continuing businesses is in our view strong. In FY16, continuing EBITDA margins stood at 38%, substantially higher than the 23% reported in the same period for the whole group. Stable revenues in electronic markets were offset by continued investment in electronic platforms, which resulted in a 16% yoy decline in adjusted operating profit for the division. The post-trade division continued its resilient track record, posting 4% yoy higher revenues, reflecting sound demand in risk mitigation products. Credit risk is low and mainly relates to matched principal transactions, where ICAP acts as counterparty to two matching trades. Where one of the parties fails to honour their obligation, ICAP is exposed to the market risk of the underlying instrument, which it seeks to eliminate as soon as possible. We understand from management that such instances are infrequent. We view operational risk as increasingly relevant for ICAP, given the importance of system resilience for its continuing operations. In FY16, around 56% of revenues were generated by electronic platforms. Despite the disposal of the voice broking business, which in our view reduces the potential for litigation-related losses, ICAP remains liable for the outcome of the Commodity Futures Trading Commission's (CFTC) investigation into the setting of USD ISDAfix rates. The ratings also reflect ICAP's healthy funding, liquidity and interest coverage, with EBITDA covering around 9.2x interest expense in FY16. We expect interest coverage for continuing operations to be slightly weaker but still above the 6.0x typical threshold for a 'BBB' rating category. Upon completion of the transaction with Tullett and the reimbursement of GBP330m debt from Tullett to IGHP, we expect unrestricted cash to be around GBP200m. We view this cash buffer as credit-neutral as we expect it will largely be reinvested in the business or used for acquisitions. We do not expect the NEX Group, ICAP's successor after the transaction, to be subject to consolidated regulatory capital requirements. IGHP is a wholly-owned non-operating subsidiary of ICAP and the obligor of the group's bank facilities, loans and debt, with the exception of the group's retail bond, a EUR15m senior note and European commercial paper, none of which was outstanding at FYE16. IGHP's senior notes contain a financial covenant that ensures IGHP consolidates at least 85% of the group's EBITDA, supporting the alignment of its ratings with ICAP's. RATING SENSITIVITIES IDRs AND SENIOR DEBT ICAP's Stable Outlook reflects our expectation that ICAP's gross debt/adjusted EBITDA will reduce from its elevated post-transaction level, which we estimate at close to 2.5x, the upper end for an investment grade-rated IDB. Should leverage remain at close to 2.5x beyond the short-term, which could result from higher-than-expected revenue pressure, unsustainably high investment costs or a loss of franchise, this could put pressure on ICAP's ratings. Given ICAP's renewed focus and reliance on electronic platforms, the ratings could come under pressure if operational risk materialises. This could arise from a failure to maintain system resilience resulting in a loss of franchise or revenue, or from business restrictions or outsized financial penalties following legal or regulatory actions. The outcome of the CFTC's investigation into the setting of USD ISDAfix rates is, in our view, the most significant legal contingent liability for the group. Upside is limited in light of ICAP's reliance on electronic platforms, but could result from a reduced reliance on transactional and bank revenue, materially lower leverage or a longer track record of stable and sound profitability. The rating actions are as follows: ICAP Plc Long-Term IDR affirmed at 'BBB'; Outlook Stable; Short-Term IDR and commercial paper programme affirmed at 'F3'; Senior debt affirmed at 'BBB'. ICAP Group Holdings plc Long-Term IDR affirmed at 'BBB'; Outlook Stable Short-Term IDR affirmed at 'F3' Senior debt affirmed at 'BBB' Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Luis Garrido Analyst +44 20 3530 1631 Committee Chairperson Sean Pattap Senior Director +1 212 908 0642 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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