By Richard Barley

LONDON (Reuters) - Intermediate Capital Group Plc, a lender to private equity buyouts, warned on Wednesday of more credit trouble ahead but reported higher profits and said it was well placed to ride out a recession in the UK.

ICG <ICP.L> said pretax profit for the year to March 2008 rose 2 percent to 230 million pounds ($454.7 million), helped by gains on hedges, while core income, its preferred measure of results, rose 22 percent to 136 million pounds. The company's shares rose, and were up 2.6 percent at 1502 pence by 3:42 a.m. EDT.

ICG said its current portfolio was performing "satisfactorily," although some impairments are expected, but added it would be highly selective in choosing new investments.

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"When making new investments, we assume that there will be a recession in the U.S., UK and Spain and a slowdown elsewhere," the company said. "The problems in the credit market will not be solved soon and we expect further and considerable volatility."

Tom Attwood, managing director of ICG, said the diversity of the company's investments would help limit the impact of these problems on its portfolio.

"From where we are now, which is no defaults in the past five years, it's going one way," he said in a telephone interview. "In the UK and Spain there certainly will be defaults."

However, other countries in Europe are favorably exposed to emerging economies that are still growing, while Asia remains largely untouched by the crisis, Attwood said. The company has only 17 percent of its portfolio invested in the UK, he said.

ICG said it had set aside 46 million pounds against possible future losses.

Despite the credit crisis, mezzanine finance -- which ranks between senior debt and equity, and which often blends features of the two -- has enjoyed a resurgence in Europe in recent months as the public high-yield bond market has remained shut.

ICG said it invested 1.7 billion pounds in a record 36 deals in the year to March 31, and has 1 billion pounds available to invest from its own balance sheet as well as a further 1.3 billion pounds in its mezzanine funds.

"We're seeing probably a better balance of risk and reward and more opportunities than we've seen for a very long time," Attwood said. "You've got senior debt being offered in the 80s. These are par loans ... they're called par loans because they're meant to trade at par."

CDO MARKET SHUT

ICG also said it believed the market for collateralized debt obligations -- structures that bundle together corporate debt into pools and issue bonds backed by the underlying cash flows, a key feature of the pre-crisis credit market -- was essentially shut.

"You couldn't raise a CDO for love nor money today, and neither is there any prospect of you doing so," Attwood said. "Is it (the market) dead? I hope not. But you won't see many CDOs this year."

This, however, means that competition for funding and for investments has eased. "The cash flowing into the European leveraged loan markets has essentially dried up," ICG said.

ICG has boosted its funding sources in the first quarter of 2008, however, raising 175 million pounds through a rights issue and closing a 500 million pound three-year bank loan facility with Royal Bank of Scotland <RBS.L> and Lloyds <LLOY.L>.

The debt raising came even as credit markets were shocked by multi-billion dollar writedowns by some of the world's biggest banks.

Philip Keller, finance director at ICG, said the loan was a sign of the trust of its lenders. "We're not aware of many companies of our sort that are able to raise that sort of debt," he said.

(Reporting by Richard Barley, editing by Elizabeth Fullerton and Sue Thomas)