3i suffers downgrade on leverage worries

A continuing bear market could leave the London-listed buyout group with net debt to equity levels of more than 70%, according to analysts at Morgan Stanley.

3i’s leverage levels both at underlying portfolio and group level continue to cause concern to market analysts. In a note to clients this morning investment bank Morgan Stanley downgraded the group’s shares from “overweight” to “equal-weight”.

Morgan Stanley raised concerns that pressure to deleverage throughout 2009 could lead 3i to sell assets at “suboptimal” prices or to increase its capital base. In the bank’s base case forecast, 3i’s leverage levels rise to more than 70 percent, compared to a target of between 30 and 40 percent.

As well as gearing levels, the bank cited the wider issues of tightened cash flow at a time when capital calls are rising and opacity in the valuation of underlying portfolio companies.

This morning’s note follows a call last month from JPMorgan Cazenove analyst Chris Brown for 3i to divest assets “where it can at good prices” and to avoid making any new investments.

Traded on the London Stock Exchange, 3i’s shares dropped to an all time low of £2.43 in December, and have since recovered slightly, trading at £3.28 today. At the start of 2008 the shares traded at £10.05.