Bahrain-Based Arcapita Bank Downgraded To 'BB-' On High Leverage; Outlook Negative

Press Release

PARIS (Standard & Poor's) June 1, 2009--Standard & Poor's Ratings Services said today that it has lowered its long-term counterparty credit ratings on Bahrain-based Arcapita Bank (Arcapita) to 'BB-' from 'BB' and removed them from CreditWatch, where they were first placed on Jan. 28, 2009, with negative implications. At the same time, we affirmed our 'B' short-term rating on Arcapita. The outlook is negative.

The ratings reflect our opinion of Arcapita's stand-alone credit profile and do not include any uplift for extraordinary external support. However, Standard & Poor's recognizes that ongoing support from Arcapita's shareholders has been significant and is incorporated in Arcapita's stand-alone credit profile.

"The rating action reflects our opinion of Arcapita's high leverage in the context of a very difficult economic and investment climate, which has challenged Arcapita's business model, reduced the value of its assets, and put pressure on its financial performance," said Standard & Poor's credit analyst Mohamed Damak.

Arcapita's financial profile deteriorated significantly in 2008. Financial leverage (as measured by, among other indicators, the ratio of net debt to investment portfolio value or loan-to-value ratio [LTV]) increased rapidly during 2008, as Arcapita made large investments that it was not able to fully place with its customers. This also put pressure on Arcapita's liquidity toward the end of 2008. Positively, we note that Arcapita has been successful in implementing measures to reduce its leverage and improve its liquidity position.

"In our view, these measures have alleviated Arcapita's short-term liquidity pressure. In addition, we estimate that these measures resulted in a reduction of Arcapita's LTV ratio from almost 80% at Dec. 31, 2008--prior to the implementation of above-mentioned corrective measures--to slightly more than 55%--taking into account all the above-mentioned measures," said Mr. Damak.

We believe that Arcapita intends to further reduce its leverage in the next 12 to 18 months--through placements and exits. However, we are of the view that the current environment is making significant leverage reduction challenging especially as Arcapita is mindful of not damaging long-term shareholder value by exiting at this low point in the valuation cycle.

Standard & Poor's expects Arcapita's financial performance to remain weak in 2009 owing to the gloomy outlook for private equity, investors' limited appetite for alternative assets, the deteriorated economic conditions in the U.S. and Europe-–the two major regions of Arcapita's investments--and the high likelihood that Arcapita will have to book write-downs on its investment portfolio.

The negative outlook reflects our view of Arcapita's excessive market value gearing for the current ratings. It also reflects our view that its earnings will likely remain susceptible to portfolio provisions, and the need to preserve cash could constrain its ability to make new investments.

"Failure to restore the LTV ratio, so that it falls within our 40% rating threshold in the next 12 months, would put further pressure on the ratings," said Mr. Damak.

The outlook also reflects our belief that Arcapita's creditworthiness is dependent on its operating environment and the revival of placements and exits, or management's decision to more aggressively divest its investments if the environment does not improve. The outlook could be revised to stable if leverage is materially managed down from current levels, if Arcapita demonstrates an ongoing commitment to a more predictable and conservative leverage policy, and if it maintains adequate liquidity.