Rating agency affirms broker’s B rating but warns on risks of transformation plan

Rating agency Fitch has given Towergate’s B issuer default rating (IDR) a negative outlook because of the broker’s falling profits and “persistently high” debt levels.

Fitch affirmed the B rating because of Towergate’s “leading position” in the UK broker market and its established relationships with leading insurers.

But is changed the outlook to negative from stable because of the broking group’s profitability, debt and also its transformation plan, which the rating agency said was putting pressure on Towergate’s free cash flow and contained “inherent risks”.

The agency said: “Given the prospects of subdued organic performance, we view Towergate as being reliant on successfully extracting its planned operational efficiencies as well as integrating recent debt-funded acquisitions to bring the company’s credit metrics back to levels that are more commensurate with a B IDR and a stable outlook.”

‘Inherent risks’

On Wednesday Towergate announced that its operating profit had fallen by 12% and its loss before tax had worsened by 52% in the first half of 2014.

The broking group is banking on cost savings from its transformation plan to boost profitability in the second half of 2014 and beyond.

Fitch said the transformation plan “has some merits” and added: “We expect some cost-saving opportunities to materialise.”

But the agency also said: “In our view, there are inherent risks in implementing such a large transformation plan.

“We will monitor how operational efficiencies are extracted and the extent to which profitability improves and leverage reduces as soon as [full year 2015].

“Any material deviation from the cost savings plan could translate into sustained weak credit metrics as financial results for [the first half 2014] indicated further EBITDA pressure at Paymentshield and the Retail (Insurance Brokers) division.”

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