Fitch Ratings has affirmed IG Group Holdings PLC's (IG Group) and IG Markets Limited's (IG Markets) Long-Term Issuer Default Ratings (IDR) at 'BBB-'.
The Outlooks are Stable. At the same time Fitch has affirmed the 'BBB-' rating of IG Group's GBP300 million 3.125% senior unsecured notes maturing in 2028. The notes are issued under a GBP1 billion Euro Medium-Term Note (EMTN) programme, which Fitch has also affirmed at 'BBB-'.
IG Markets' rating is equalised with that of IG Group, in line with the 'common ratings' approach of Fitch's Non-Bank Financial Institutions Rating Criteria. This is because IG Markets is very large relative to IG Group and highly integrated within management, capital management and systems, resulting in highly correlated credit profiles.
Key Rating Drivers
IG Group's and IG Markets' Long-Term IDRs reflect their leading franchise in the provision of over-the-counter (OTC) leveraged trading to a retail client base, good progress made by management to diversify the business and grow the total addressable market as well as IG Group's solid financial metrics. The ratings also reflect Fitch's view that the current business scope acts as a constraint on the ratings as IG Group's revenues are largely derived from the OTC business line and a relatively small pool of high-value but long-tenured clients.
Fitch views positively management's objectives to grow the exchange-traded derivatives (ETD) business line, which has resulted in business diversification and is expected to deliver further diversification. IG Group has been successful in retaining its client base following record numbers of clients onboarded during the height of the pandemic-induced volatility of 2020. Revenues have also proved robust with the group consistently generating a good level of profitability, which is indicative of its solid client base and its sound risk management.
IG Group is a leading provider of OTC leveraged trading products, mainly in the form of contracts for difference, to retail clients. Despite recent diversification, its largest geography by revenue is the UK, where it is listed. The group also has a growing presence in Europe, North America, Africa, Asia-Pacific and the Middle East and operates through the IG, tastytrade, Spectrum and DailyFX brands. The retail trading sector has shown strong growth over recent years, buoyed by high market volatility providing trading opportunities. There is also evidence of structural factors contributing to this growth as retail trading has become more mainstream post-pandemic, as part of an ongoing shift toward self-directed financial management. However, the sector is highly competitive, and lower levels of market volatility along with a recessionary environment could dampen trading activity.
In the traditional OTC business, IG Group acts as counterparty to client trades and nets off trades internally (internalises) before hedging externally. Net trading revenue is derived from client income (commissions, spread and funding costs) less the trading-book cost (IG Group's losses/gains on client trades net of their hedging losses/gains). The OTC business model relies on client income exceeding the trading-book cost and net trading revenue is therefore dependent on client-trading volumes generating sufficient client income and also minimising external hedging costs by increased internalisation. IG Group has a critical mass in most of its markets, which allows it to benefit from economies of scale and reduce external hedging costs.
Short-term, direct market risk is a feature of IG Group's business model as it offers an instant execution service for clients and thereby accepts residual market risk before hedging externally. We believe that this risk is adequately managed as IG Group has consistently generated a significant amount of net trading revenue and has maintained its client income-to-net trading revenue ratio at a fairly stable level. Profitability, as measured by EBITDA to revenue, is strong at 58% for FY22 (FY21: 57%).
The ETD business consists of tastytrade, Inc., a US-based brokerage group primarily servicing retail customers trading and investing in listed futures and options that IG Group acquired in 2021, and Spectrum, a pan-European retail exchange. As part of the ETD model, IG Group is not counterparty to client trades and revenue is generated mainly through royalty and platform fees. Fitch expects this business line to become a materially larger part of IG Group's business over the medium term and to enhance diversification of products, clients and geography.
Fitch expects the regulatory backdrop for IG Group to remain stable over the medium term, as over 90% of its OTC leveraged revenue is derived from countries that have already imposed leverage restrictions, but the group's retail focus exposes it to heightened regulatory risk. Key jurisdictions have implemented a number of regulatory restrictions aimed at reducing the risk that retail clients can assume when trading OTC leveraged products. Notably, ESMA restrictions led to a significant decline in IG Group's revenue in FY19. The principal source of this regulatory risk is concern about customer product suitability and is reflected in our ESG score of 4 for 'Exposure to Social Impacts'.
Credit risk is mitigated by retail clients having mandatory negative-balance protection in nearly all jurisdictions as well as by IG Group's collateral requirements and close-out monitoring process. Furthermore, financial institution counterparties are generally highly rated.
Operational risk is material for IG Group and platform problems could have a significant impact on its reputation and revenue. Fitch views operational risk management as robust, with modest risk losses in the context of recent extremely high levels of trading and account applications.
IG Group's leverage is modest and capitalisation is sound, which adds stability to its overall credit profile, with gross debt to EBITDA of 0.5x at FYE22 (FYE21: 0.2x). Debt comprises an inaugural GBP300 million senior unsecured bond that was issued in November 2021 to refinance existing term loans. Regulatory capital is now assessed under the Investment Firms Prudential Regime and IG Group is currently in a transition period. Capital held is comfortably above the current regulatory requirement and we expect this to remain the case once the transition period comes to an end. Management has formalised a new capital allocation framework that targets capital distributions of around 50% of adjusted profit after tax.
IG Group holds a significant amount of liquid assets of over GBP2 billion at FYE22, of which around GBP1 billion is restricted, due to operational and regulatory reasons. Unrestricted liquidity is sound at around GBP1 billion at FYE22. Broker margin requirements are the largest liquidity requirements for IG Group, in particular, the initial margin requirement, which can be volatile and varies depending on the level of internalisation, the product mix of hedging positions as well as hedging brokers' perceived credit risk of IG Group. In Fitch's view, while IG Group's liquidity risk can be material, it is managed adequately with stress-testing forming part of IG Group's liquidity planning. Additionally, IG Group has increased its committed revolving credit facility, which now stands at GBP350 million (undrawn at FYE22).
SENIOR UNSECURED NOTES
The rating on IG Group's senior unsecured notes is equalised with IG Group's Long-Term IDR and is driven by the same considerations driving the rating of IG Group.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A worsening regulatory environment for IG Group, which results in a material reduction in profitability, although not expected by Fitch, would be rating-negative, in particular if it affects its UK home market or multiple markets simultaneously.
Franchise reduction and increasing concentration of the business lines and client base would be negative for IG Group's ratings, as would an increased risk appetite or evidence that the current risk controls prove insufficient to contain market, credit or liquidity risks.
A significant adverse reputational or operational event damaging IG Group's franchise or financial strength could also be rating-negative. Similarly, sustained and material deterioration of IG Group's financial metrics, which could arise as a result of client-income generation being lower than is needed to offset the corresponding trading P&L or from a significant increase in debt or initial margin requirements, would also put pressure on IG Group's ratings.
A material increase in double leverage, as calculated by Fitch, (in particular if sustainably in excess of 120%) could have a negative rating impact.
SENIOR UNSECURED NOTES
The programme and debt ratings are principally sensitive to a change in IG Group's Long-Term IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The limited diversification of IG Group's current business is a constraint on the rating. A material increase in the diversification of products offered and the client base and clear franchise gains, in particular in non-OTC business lines, could lead to an upgrade, providing there is no material increase in its risk appetite or deterioration of financial metrics and IG Group demonstrates an ability to maintain performance in more difficult market conditions. In particular, a more meaningful franchise in products not directly correlated with IG Group's dominant CFD business line and further regional diversification with a decreased reliance on the UK market would be credit-positive.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
IG Group Holdings PLC has an ESG Relevance Score of '4' for Exposure to Social Impacts reflecting regulatory risk regarding customer product suitability, in particular, ESMA's recent restrictions on products sold to retail clients and similar restrictions from ASIC. These have a negative impact on the credit profile, and are relevant to the rating[s] in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
IG GROUP HOLDINGS PLC 
