Moody's downgrades Investcorp to Baa3/P-3/D+; deposit ratings remain on review for possible further downgrade

The ratings of its subsidiary Investcorp S.A. were also downgraded to the same level.

Moody's also kept the deposit ratings on review for possible further downgrade.

According to Moody's, the decision to downgrade Investcorp's deposit ratings and BFSR reflects near-term pressures on the bank's financial
strength as well as Moody's view on some of the longer-term challenges for the alternative investment sector, as a whole.

The rating agency highlights: (i) the weakened capitalisation metrics, following material
mark-to-market losses incurred on its proprietary investments in funds of hedge funds ("FoHF"), (ii) the requirement for a larger capital cushion to support the bank's proprietary investments, within the context of a
very challenging operating environment for hedge fund and private equity ("PE") businesses, and (iii) the pressure on earning capacity from
possibly prolonged difficult market conditions.

Moody's said that the value of Investcorp's FoHF investments declined by about 10% in the quarter ended September 2008.

With FoHF holdings of $2.02bn at the end of June 2008, this resulted in mark-to-market losses of about $200.0m for Investcorp, equivalent to 17% of equity.

Moody's estimates that capital levels at the end of September were about $900.0m, equivalent to about 26% of combined PE and FoHF assets of $3.5bn.

The bank reported a Basel II capital adequacy ratio of 13% at the end of September, down form 18% in June 2008.

"Moody's recognises that Investcorp is committed to raising new capital and deleveraging its balance sheet by redeeming a portion of its FoHF investments. Moody's decision to keep the bank's Baa3/Prime-3 ratings on review for possible further downgrade reflects the challenges the bank may face in implementing these plans within the current difficult operating environment.

Successful implementation of capital-raising and
deleveraging plans within the projected timeframe of about three or four months would lead to a confirmation of the rating.

Failure to implement these plans, along with further significant losses on proprietary
investments over the same period could lead to further downgrade," says George Chrysaphinis, a Moody's Vice President - Senior Analyst, and lead analyst for Investcorp.

Moody's elaborated that Investcorp is planning to raise additional capital and to reduce its FoHF investments in the near term.

"These moves would bring risk assets (essentially PE and FoHF investments) down
to about two times capital, which Moody's believes is a more appropriate level for an investment grade rated firm with Investcorp's business profile and franchise characteristics," adds Mr Chrysaphinis.

Moody's continues to hold a positive view on Investcorp's fee-generating business model and on the prospects for further franchise enhancement over the medium-to-long term.

Moody's notes (i) the very strong growth in assets under management to $12.8bn in the financial year to June 2008 from its core Gulf Cooperation Council ("GCC") market and also new markets, (ii) the success of product-broadening activities and marketing activities -- in both PE and FoHF businesses -- and also (iii) the further enhancement of its risk management infrastructure and processes.

Furthermore, Moody's reiterates its view that as a Wholesale bank under the Central Bank of Bahrain definitions, there is only a small likelihood of systemic support for Investcorp.

As such, Moody's does not impute any uplift for the bank's deposit ratings as a result of such support.