Moody's downgrades Towergate's outlook

Moody's Investors Service has downgraded Towergate’s rating outlook from stable to negative.

The ratings agency has affirmed the B2 Corporate Family Rating (CFR) of Towergate Partnership Limited, but revised its outlook from stable to negative.

Moody's previously upgraded the CFR to B2 in July 2009 following the successful integration of Paymentshield into Towergate.

The current B2 rating incorporates Moody's expectation of the EBITDA margin remaining consistently above 20% together with some improvement in financial leverage from the 2008 level (2008 debt-to-EBITDA of 7.3x and interest coverage of 0.7x, on a Moody's basis).

David Masters, Moody's lead analyst for Towergate, noted, "The rating affirmation reflects the continued strong market position Towergate maintains within the UK broker market, combined with healthy levels of free cashflows and excellent levels of profitability, at least on an EBITDA basis, where margins have consistently exceeded 25% of revenues, on Moody's basis.

Commenting on the outlook change, Masters noted that Towergate's ability to deleverage, which was expected at the time of its previous rating upgrade in July 2009, has been hampered by ongoing macro-economic challenges and suppressed levels of investment income, which have also affected other similarly rated insurance brokers to varying degrees.

Whilst part of the outstanding debt obligations remain off balance sheet, the relatively high levels of financial leverage/interest expense are likely to result in pressur on bottom-line profitability in the near-term.

Furthermore, the UK insurance market - from which Towergate derives the majority of its revenues - remains highly competitive, with direct commercial insurance premium rates hardening only slowly during 2009

Whilst considered unlikely in the short-term due to the current negative outlook, factors that could lead to an upgrade include adjusted free cash flow exceeding 10% of debt, a debt-to-EBITDA ratio of less than 4.5 times and interest coverage exceeding 3.0 times.

Towergate controls around £1.7bn of premiums through its four main business divisions, covering retail insurance broking, insurance networks, underwriting services to insurers under delegated underwriting authority agreements and Paymentshield.

For the year ended 31 December 2008, Towergate reported commission and fee income of £318m and a net loss of £19m.