Fitch Ratings has affirmed TP ICAP Group plc (TP ICAP) and TP ICAP Finance plc's Long-Term Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlooks.

Fitch has also affirmed TP ICAP Finance plc's long-term senior unsecured debt at 'BBB-'.

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 GBP1,132 million and a 26% rise in reported profit before tax to GBP91 million, reflecting continued strong market activity in 1H23, particularly in the rising rates environment. Revenues in most of TP ICAP's key segments increased, with the exception of Liquidnet, which suffered a 2% yoy drop in revenues. This was attributable to slower improvements in equity markets, notably a sharp drop in block trades.

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 GBP100 million of cash via structural efficiencies, ahead of the end-2023 target it announced 12 months ago. Fitch expects GBP100 million to be used in 1Q24 to pay down vendor loan notes (VLN) and deferred consideration related to the Liquidnet transaction. TP ICAP has also announced a share buyback programme of GBP30 million funded by a range of initiatives, as well as cash generation.

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 GBP983 million of cash and cash equivalents at end-1H23. Liquidity is also supported by a GBP350 million revolving credit facility and a JPY10 billion revolving facility, both of which remained undrawn at end-1H23.

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 (GBP37 million) and Liquidnet VLN (GBP40 million). TP ICAP's next bond maturity is in May 2026, limiting the issuer's need to access the market over the Outlook horizon.

Finance Company Rating Equalised: TP ICAP Finance plc is rated in line with TP ICAP in view of its role as a group financing company and the guarantee of its debt by TP ICAP. TP ICAP Finance plc's senior unsecured debt is rated in line with its Long-Term IDR as Fitch views the probability of default as materially the same and expects average recoveries, in the absence of material higher or lower ranking debt.

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.

TP ICAP Finance plc's LT IDR is primarily sensitive to changes in TP ICAP's Long-Term IDR.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

Equalised with IDRs: The senior unsecured notes are rated in line with TP ICAP Finance plc's Long-Term IDR, as Fitch views the probability of default as materially the same and therefore expects average recoveries.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The senior unsecured debt rating is primarily sensitive to changes in the Long-Term IDRs of TP ICAP Finance plc and TP ICAP.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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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