Fitch Affirms UK's ICAP at 'BBB'; Outlook Stable

Tue Jun 24, 2014 4:48pm EDT

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(The following statement was released by the rating agency) LONDON, June 24 (Fitch) Fitch Ratings has affirmed UK-based ICAP plc's and ICAP Group Holdings plc's (IGHP) Long- and Short-term Issuer Default Ratings (IDR) at 'BBB' and at 'F3'. The Outlooks are Stable. The ratings on the senior and subordinated debt issued by ICAP and IGHP were also affirmed. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS - IDRS AND SENIOR DEBT ICAP's ratings are primarily driven by its operations as the largest inter-dealer broker (IDB) with strong market shares in traditional brokerage, complemented with a sound franchise in electronic broking and post-trade and information services. This diversification has helped the company to manage continued pressure on revenue from traditional broking activities. Electronic broking and post-trade and information businesses accounted for 69% of operating profit in the financial year to March 2014, when trading volumes continued to suffer. The ratings also reflect Fitch's expectation that the company will continue to manage its cost base down to mitigate continuing pressure on revenue. Revenues continued to decline in FY14, when they fell 5%, and operating expenses, excluding acquisition and disposal costs and exceptional items, were cut 5.5% over the same period. ICAP realised annualised operating cost reductions of GBP80m in FY13 and a further GBP25m in FY14. The company is committed to reducing costs by a further GBP100m in the next two years, which will be important in underpinning its profitability. Fitch considers ICAP's capitalisation adequate for its ratings. The increase in gross debt in FY14 was primarily caused by the issue of EUR350m senior debt, the proceeds of which will be used to repay a EUR300m senior bond maturing in July 2014. Adjusted for the maturing bond, ICAP's gross debt to adjusted EBITDA of 1.6x at FYE14 was in line with its ratings. ICAP is exposed to material operational risks, and legal and reputational risks are high among inter-dealer brokers. Following a settlement, in September 2013, with the UK's Financial Conduct Authority (FCA) and the US Commodity Futures Trading Commission (CFTC) for GBP55m related to compliance failure within ICAP Europe's yen Libor operations, ICAP was issued with a Statement of Objections from the European Commission in June 2014. The Commission is investigating the possible breach of EU antitrust rules by 'facilitating cartel infringements in the market for interest rate derivatives denominated in the yen currency', which could result in a material fine for the company. ICAP has stated that it will defend itself against these allegations. IGHP is a fully controlled, non-operating subsidiary of ICAP and the obligor of the group's bank facilities, loans and debt, with the exception of the group's subordinated debt, retail bond, a EUR15m senior note and European commercial paper. IGHP is covenanted to consolidate at least 85% of the group's EBITDA, supporting the alignment of its ratings with ICAP. RATING SENSITIVITIES - IDRS AND SENIOR DEBT ICAP's ratings are based on our expectation that the company will continue to execute its strategy successfully, and that growth in its electronic broking and post-trade and information businesses will mitigate ongoing pressure on broking revenue. As we expect further pressure and continuing headwinds for the sector, an upgrade of ICAP's ratings is unlikely given the company's profile. ICAP's ratings would come under pressure if EBITDA suffers, leading to a material deterioration in core leverage metrics. This could be caused by the company being unable to reduce operating costs further. Ratings would also come under pressure if regulatory developments lead to an erosion of the company's franchise, or if related expenses put pressure on earnings. We expect any fine arising from the ongoing investigation by the European Commission to be manageable given ICAP's robust cash flow generation, but a sizeable fine that would induce weaker leverage metrics could result in a downgrade if the company does not take measures to restore capitalisation swiftly. KEY RATING DRIVERS AND RATING SENSITIVITIES - SUBORDINATED DEBT The rating of ICAP's subordinated bonds is one notch below the company's Long-term IDR, reflecting loss severity. As the notes' rating is notched off the company's IDR, the issue rating is sensitive to the same factors as the IDR. The rating actions are as follows: ICAP plc Long-term IDR affirmed at 'BBB'; Outlook Stable Short-term IDR and commercial paper affirmed at 'F3' Senior debt affirmed at 'BBB' Subordinated 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 Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Erwin Van Lumich Managing Director +34 93 323 8403 Committee Chairperson Joo-Yung Lee Managing Director +1 212 908 0560 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, Global Financial Institutions Ratings Criteria, dated 31 January 2014 and Securities Firms Criteria, dated 31 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Securities Firms Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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