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3i woes continue with S&P downgrade

Standard & Poor’s has downgraded 3i’s credit rating to BBB, just two notches above junk status, citing volatile investment performance and persistent negative cash flow.

Standard & Poor’s has downgraded 3i Group’s credit rating citing continued pressure on its net asset value, though the beleaguered private equity group was also given a stable outlook.

S&P downgraded 3i’s long-term counterparty credit rating from BBB+ to BBB, pointing to a difficult operating environment that will continue to strain the group’s net asset value (NAV) and consequently its leverage metrics.

“We also consider that it will take longer than expected for 3i to grow management fee income and achieve positive cash flows (after excluding realisation proceeds and noncash revenue items),” the ratings agency said in a statement.

S&P noted efforts at 3i to grow income from fees, including the acquisition of the debt management business of Japanese lender Mizuho in February 2011, but said it still expected “persistent negative cashflow”. The agency also said the prospect of an upgrade over the next two years was “remote.”

The stable outlook did offer some good news for the UK’s largest listed alternative asset manager. “Our rating concerns are partially mitigated by 3i's consistent policy to hold high liquidity relative to peers and its satisfactory debt maturity profile,” said S&P.

The agency also referred to 3i’s global network, credible reputation, very long track record and good access to deal flow. “We consider that the investment portfolio is reasonably diverse by business classification and geography.”

“The stable outlook reflects our expectation that 3i's sound liquidity and conservative leverage policy of managing net debt will continue to support its financial profile over the two-year outlook horizon,” said the agency.

The downgrade continues a tough period for 3i. Shares continue to trade at a significant discount to NAV, a situation that led to an unceremonious demotion from the FTSE 100 index for the UK’s oldest private equity group in September.

Shares rose earlier this month on speculation that the listed firm’s dealmaking unit would be spun out in a management buyout, leaving shareholders with just the private equity portfolio. 3i declined to comment on any spin-out.