Fitch Ratings has affirmed
Fitch has also affirmed
Key Rating Drivers
Leading IDB Franchise: TP ICAP's Long-Term IDR reflects its leading global franchise in the inter-broker dealer (IDB) sector, with a sound record of managing liquidity and risk controls. It also considers the reliance of the group's revenues on financial market activity, which can to some extent be offset by reduced variable costs in a downturn, and the resultant sensitivity of cash-flow leverage to EBITDA generation.
Headwinds from Electronification: TP ICAP has longstanding strengths in interest rates and foreign currencies/money markets and an established franchise in energy and commodities. IDBs have faced structural challenges in recent years from greater electronification of the industry. Following its 2021 acquisition of dark trading venue Liquidnet, TP ICAP has developed the 'Fusion' platform to address this, providing clients with aggregated liquidity for specific asset classes, price discovery and trade executions through a single log-in.
As of end-1H23, the platform is live on 44% of in-scope desks, with the largest usage in the FX segment. The group also has a growing data and analytics business, capitalising on its large volume of proprietary over-the-counter data that can be repackaged and sold to clients.
Sound 1H23 Profitability: In 1H23, TP ICAP reported a 5% yoy increase in core revenues to
Need to Manage Cost Base: TP ICAP's operating margin, as measured by EBITDA (adjusted for share based compensation and share of JV earnings) to revenue, was around 19% for 1H23, and remains constrained by the group's cost base. Broker compensation is subject to significant competitive pressure and (consistent with peers) was equal to over 50% of revenues, but a significant variable component offers some protection if earnings decline.
Some Deleveraging Potential: As of end-1H23, TP ICAP had freed up
Earnings are typically softer in the second half of the year and we expect leverage in 2H23 and over the Outlook horizon to remain above the end-1H23 gross cash-flow leverage (gross debt/ EBITDA) of 1.9x on an annualised basis but below the downgrade trigger of 2.5x. Fitch also notes that TP ICAP retains significant cash for liquidity purposes, materially reducing leverage on a net basis.
Adequate Liquidity: TP ICAP requires significant liquidity to meet margin calls and address unexpected non-settlements experienced during ordinary operations. However, TP ICAP has remained resilient, with adequate liquidity provisions in place during 2022 and 1H23. TP ICAP reported
Limited Short-term Funding Requirements: TP ICAP's funding profile is stable, with short-term debt maturities limited to re-payment of the residual balance of the 2024 notes (
Finance Company Rating Equalised:
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Significantly weaker EBITDA, through revenues declining amid reduced market activity or through cost pressures, in particular if TP ICAP's cash flow leverage exceeds 2.5x on a sustained basis.
Market-share losses and franchise damage resulting from a failure to keep pace with evolutions in trading practices in the IDB market.
Large operational losses, deficiencies in liquidity, credit- and market-risk management, or negative repercussions from any regulatory or legal actions.
Material reduction in equity retention, or a significant decline in the fungibility of liquidity or capital within the group.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Cash-flow leverage sustainably below 2x and an improvement in the EBITDA margin towards 25%, while continuing to improve earnings diversification and maintaining a prudent balance sheet and liquidity profile.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
Equalised with IDRs: The senior unsecured notes are rated in line with
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The senior unsecured debt rating is primarily sensitive to changes in the Long-Term IDRs of
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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