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Tue 29 Sep 2009 11:44 PM

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Moody's downgrades Bahrain's Investcorp

Long-term deposit ratings cut to Ba2 from Ba1, bank financial strength rating (BFSR) to D from D+.

Ratings agency Moody's confirmed on Tuesday it has downgraded the long-term deposit ratings of Bahrain's
Investcorp Bank B.S.C. (Investcorp)

to Ba2 from Ba1 and its bank financial strength rating (BFSR) to D from D+.

The ratings of its subsidiary, Investcorp S.A., were downgraded to the same level.

Moody's also assigned a negative outlook to the bank's ratings.

The downgrade comes after Moody's initiated a review of

’s rating in November 2008. At the time the agency downgraded the bank by one notch to Baa3/Prime-3/D+ and subsequently downgraded further to Ba1/Not-Prime/D+ in May 2009, with the ratings remaining on review for further possible downgrade.

The latest rating action has been driven by the continued fragility of

's financial condition, which Moody’s says is better reflected by a rating in the middle of the Ba category.

The agency arrived at this decision after assessing the combined effect of the bank's successful placement of $500 million of preference shares with investors in Q4 2008-09 (fiscal year ending June 2009) and the $269 million loss it posted in H2 2008-09. For the year the bank lost $780.6 million.

"Although current capital ratios would be consistent with a rating at the upper end of the Ba category under normal operating circumstances, they are currently vulnerable to further mark-to-market losses on its (

’s) investments, without relief from predictable earnings streams," George Chrysaphinis, a Vice President-Senior Analyst at Moody's said in a statement.

Chrysaphinis added that the Ba2/Not-Prime/D rating is supported by Investcorp's sound liquidity profile, where cash resources currently exceed maturing debt for the next two fiscal years.

He went on to say the agency expects

to successfully refinance at least part of its maturing long- and medium-term debt over the next few months.

However, the negative outlook on the bank's ratings reflects concerns about the timing and strength of a potential recovery in the global economy and in investor appetite for alternative investments.

"A recovery in investment portfolio profitability and a return to robust fee generation are required to cover the bank's substantial interest and operating expenses. Any material loss in fiscal year 2009-10, or a delay in the recovery of profitability beyond 2010-11, would put further pressure on the bank's financial condition and franchise value - and would be likely to lead to a rating downgrade," Chrysaphinis cautioned.

He pointed out however that the bank's ratings could potentially be upgraded if there is evidence of a robust and sustainable recovery in earnings generation; increasing client assets under management; and/or a material improvement in ''capital metrics''.

The agency reiterated its view that there is little probability of systemic support for Investcorp as a wholesale bank under the Central Bank of Bahrain's definition.

Headquartered in Manama, Bahrain, Investcorp reported total balance sheet assets of $3.62 billion at the end of June 2009.

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