OREANDA-NEWS. 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 'F3', respectively. The Outlooks on the Long-term IDRs are Stable.

The ratings on the senior and subordinated debt issued by ICAP and IGHP have also been 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 primarily reflect our view that the group's company profile benefits from its position as the UK's largest inter-dealer broker (IDB) with strong market shares in traditional brokerage and a sound franchise in electronic broking and post-trade and information services. This diversified franchise has helped the company to mitigate revenue pressure in a challenging market environment and should enable it to maintain sound capitalisation and acceptable leverage.

The ratings are also based on our expectation that the company will be able to achieve adequate profitability following the reduction of operating expenses. ICAP's performance in FY15 (financial year end-March 2015) reflected continuing pressure on voice broking revenue and a significant restructuring programme, mitigated by a slight uptick in activity in the second half of the year linked to higher market volatility.

Reported FY15 net profit of GBP84m was 16% lower than in FY14, principally driven by an 11% revenue decline on a constant currency basis in the global broking division. Performance was also dented by GBP75m exceptional costs (FY14: GBP76m), largely related to costs to achieve GBP70m annualised savings in the global broking division.

ICAP's balance sheet usage is low given its inter-dealer broker businesses, and we therefore assess its leverage based on cash flow-based metrics. ICAP's gross debt-to-adjusted EBITDA deteriorated to 1.9x in FY15 from 1.6x in FY14, due to continued pressure on earnings. We consider the group's leverage adequate for the current rating level.

ICAP is subject to supervision by the UK Financial Conduct Authority (FCA) and operates under an investment firm consolidation waiver, under which the firm has to meet capital requirements for certain legal entities on a 'solo' basis only. The waiver expires in April 2016, and we believe that it is possible that the regulator would require ICAP to meet capital requirements at a consolidated level by the new waiver's expiry date. Based on FYE15 financials, this would mean that ICAP would have to increase regulatory capital by about GBP500m, most likely through retained earnings over a period of time. We believe that the group should be able to generate this capital, but likely with the aid of a more conservative dividend pay-out policy.

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 FCA and the US Commodity Futures Trading Commission (CFTC) for GBP55m related to compliance failure within ICAP Europe's yen Libor operations, the European Commission imposed a EUR14.9m fine on ICAP in relation to alleged competition violations in relation to yen Libor- setting. ICAP has appealed the decision and charged a GBP11m provision in FY15.

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.

SUBORDINATED DEBT
The rating of ICAP's subordinated bonds is one notch below the company's Long-term IDR, reflecting the bonds' loss severity.

RATING SENSITIVITIES

IDRS AND SENIOR DEBT
ICAP's ratings are based on our expectation that the company will continue to maintain adequate capitalisation and generate sound earnings. Given continued earnings challenges in the sector, an upgrade of ICAP's ratings is unlikely.

Given its company profile, which is more diversified than most competitors', we believe that ICAP is in a strong position to defend market share in an evolving sector that is subject to competitive pressure from existing players and new entrants. A decline in market share or threats to ICAP's market position in brokerage or in the provision of electronic trading platforms would put ratings under pressure.

ICAP's ratings would also come under pressure if revenue declines or sizeable fines result in a further deterioration in leverage metrics. We expect the group to continue reducing operating expenses to improve efficiency. ICAP's ratings are also sensitive to changes in the waiver granted by the UK regulatory authorities. Increasing regulatory capital through retained earnings would be positive for ICAP's ratings provided risk appetite does not increase.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
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'