Intermediate Capital Group (ICP)

Excellent results - but what about the CDO exposure?

Intermediate Capital Group (ICP), which provides mezzanine finance to private equity buyouts and is capitalised at £1.15bn, reported well-received interim results today. The Chairman said:

“I am pleased to report another strong performance by ICG in the six months to 30 September 2007, with core income up 24% and pre-tax profit up 33%.”

Rather than suffering from the credit squeeze and slowdown in buyout activity, ICG argues that it is a beneficiary:

“We think we are entering a phase in the debt cycle that will provide enormous opportunities to lenders with a long term approach, in both primary and secondary markets for debt. These considerable opportunities combined with a lower level of early repayments, will lead to further growth for ICG.”

That is certainly counter-intuitive but ICG’s balance sheet, which has only £31m in debt due for repayment within a year, demonstrates its strong position.

I don’t believe things will go that well, however, for three reasons.

(1) CDO exposure. ICG manages collateralised debt obligations which invest in buyout loans and this has become a significant source of fee income.

Intermediate Capital also takes some of the riskiest portion of each CDO it manage onto the balance sheet: it has about EUR10m of subordinated notes in the Eurocredit CDO V transaction, for example. The fund management business has £45m assets and I’d assume that £40m are this kind of exposure. It is not marked to market.

ICG points out that it has just launched a new CDO (which is quite an achievement) and that its deals contain no subprime or asset-backed securities. In the current market, however, I think that ICG’s business and balance sheet CDO exposure deserve to be heavily marked down.

(2) Access to capital. It is one thing to have committed long-term capital and thereby be insulated from problems in the credit markets. It is quite another to be able to raise new capital, at attractive rates, in the same troubled markets.

ICG has £172m available in cash - but will it be able to raise more?

(3) Economic slowdown. The chart below (cribbed from ICG’s annual report) shows its default rate experience this decade. For only 3 per cent of a portfolio of high risk mezzanine loans to default seems unsustainable to me. If only a few more of these investments go wrong over the next few years then earnings will suffer.

icg-default-rates.JPG

At 1.73x book ICG is neither ridiculously expensive nor temptingly cheap. It trades at only 6-7x expected 2008 earnings - but I think they are set for a couple of hard years.

November 23, 2007 | Filed Under Companies

 

Comments

One Response to “Intermediate Capital Group (ICP)”

  1. armin sternberg on November 28th, 2007 12:51 pm

    seems expensive compared to mcgc for example, im amazed that they can sell for 6-7 times earnings unless they have lots of contingent liabilities to boot.

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