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3i Group suffers credit downgrade despite move to raise cash

3i group made further moves to cut its debts yesterday with a deal to buy out and liquidate an underperforming fund, but the private equity group was hit by a credit rating downgrade just hours later.

The blue-chip company agreed a cash and shares deal for the 55.1 per cent of 3i Quoted Private Equity (QPE) it does not already own yesterday. This is the latest attempt to lower debts that stood at £2.1bn at the end of the year.

The deal will be carried out through a voluntary solvent liquidation of QPE, with its assets transferring to 3i, and should result in freeing up £110m.

Yet the announcement failed to allay the share slump, which has seen 76 per cent wiped off the group’s value in the past 12 months. It was the worst-performing stock on the FTSE 100 yesterday, falling 7.12 per cent to 202.25p.

The shares suffered after the credit rating agency Standard & Poor’s cut 3i’s debt rating from A- to BBB+ before warning that it could make further cuts if the debt burden is not reduced. S&P said the rising leverage at the group and falling liquidity of its assets this year meant the company was “no longer consistent with an ‘A’ category rating.”

The agency added that the operating environment was tough for all private equity companies “and we believe that this may linger”.

Yesterday’s QPE deal values the fund’s shares at 88p each, equal to the net asset value at the end of last month, and capitalises the fund at £355.2m, a 33.5 per cent premium to Friday’s close.

3i decided to buy as it felt the fund was hugely undervalued. “Since the onset of the dislocation to the credit markets in autumn 2007, 3i QPE’s share price has traded at a significant discount to its net asset value,” the company said.

The independent advisers Tricorn Partners recommended the deal and, including its own stake, 3i already has 65 per cent approval for the deal.

3i said it was a good offer for the fund’s investors as it gave them an opportunity to realise their investment on the current net asset value per share, as well as receive a stake in the parent company.

The deal is attractive for 3i, as it can eliminate the “double discount” it suffers on QPE’s underlying assets under mark-to-market rules.

This came just days after the group raised £60m from selling a 9.5 per cent stake in its infrastructure fund. The move was overseen by the new chief executive, Michael Queen, who headed up 3i Infrastructure before replacing Philip Yea at the end of January.

It has since emerged that Baroness Hogg, the chairman of the group, is to step down at the end of next year, and is likely to be replaced by an existing non-executive director.