S&P downgrades 3i

Ratings agency Standard & Poor’s has downgraded the UK private equity firm’s credit rating from A- to BBB+, citing a “negative” outlook for the firm amid a sharp rise in leverage and a drop in liquidity.

Publicly listed 3i Group has had its credit rating cut from an A- to a BBB+, despite recent moves to reduce its debt and increase liquidity.

Credit ratings agency Standard and Poor’s, which made the downgrade, assessed 3i’s outlook as “negative” due to a sharp increase in its debt levels in the past 12 months combined with reduced asset liquidity in the tough market.

The downgrade occurred in spite of recent defensive moves by 3i. On Monday it revealed plans to acquire the assets of its London-listed fund, 3i Quoted Private Equity, in a scheme that will result in a £110 million net cash inflow. Last week it sold a 10 percent stake in its listed infrastructure fund generating £60 million.

S&P has said that it expects 3i to “materially reduce” its debt levels or risk having its ratings lowered further. The firm was downgraded in December last year from an A+ rating to an A rating, and last month from A to A-.

In a statement S&P said it anticipates that 3i’s internal rate of return will achieve mixed results in the next 12 months despite five years of consecutively healthy returns. It also expects 3i to record a large loss in the year to 31 March 2009.

3i suffered a 53 percent loss on the value of its portfolio in the nine months ended December 31. Its top 50 investments, which accounted for 61 percent of the £5.9 billion portfolio value at 30 September, lost an estimated 21 percent, or £682 million, during the period.

The firm’s share price has nosedived since a peak of 1,128.00 pence per share in November 2007; it was trading at 196.70 pence per share at press time.

3i declined to comment.