Daily briefing: What does the refinancing mean for Towergate?

Towergate is a frequent visitor to the bond market, but it has been looking to reduce its debt levels recently, and its latest issuance will be used to restructure its existing debt.

This news should not come as a surprise to industry insiders.

Just last week Towergate’s corporate family was downgraded by Moody’s as a result of “significant” levels of debt and “limited EBITDA earnings coverage”. The consolidator needed to take action to reduce its annual interest bill, which cost the company almost £100m in 2012.

Ideally, Towergate would aim to negotiate a lower coupon on its debt payments. It currently pays 8.5% on £230m on senior secured notes due in 2018 and 10.5% on £290m of senior secured notes due in 2019.

It also has a £410m bank facility.

The refinancing move has not been helped by the Moody’s downgrade. It may mean that the markets demand a higher coupon on the new bond.

Towergate’s 2012 results

The key to the improvement in Towergate’s fortunes, will not so much be the debt reissuance, but rather its financial performance.

In its latest results Towergate announced debt levels of £1.07bn for 2012, up 4.3% on the previous year. However, its financial performance for 2012 was an improvement on 2011. It grew earnings before interest, taxation, depreciation and amortisation (EBITDA) by 4% in 2012.

It’s pre-tax profits shrunk considerably, but this was more down to the accounting switch from UK GAAP to IFRS.

The key point in all this is around acquisitions.

Towergate also made 27 acquisitions in 2012 and is not expecting to see the true benefits of these until later in 2013 and 2014. Those benefits have to start to come through or the business will be facing a huge challenge.

It would mean that the business cannot grow effectively enough to lower the debt to EBITDA ratio, and a chance of flotation would be miles off.

Simply put, under these conditions, any further refinancing of its debt would be difficult as the coupon could escalate with investors fearing the business is caught in a trap.

Chief executive Mark Hodges has said several times that he expects these acquisitions to pay off. He better hope so.