Economic woes contribute to growth lull, increasing challenge of debt reconciliation
Towergate’s earnings dropped sharply for the first six months of this year compared with the same period in 2010 as the consolidator’s performance was dragged down by the broking arm.
Adjusted EBITDA, the consolidator’s preferred metric, fell 11.9% to £66.7m. This was largely down to the retail broking division, which had earnings drop from £36m to £31.3m. Group turnover fell marginally, from £191m to £189.5m.
In a bright spot for the firm, the underwriting division performed strongly, increasing adjusted EBITDA from £16.2m to £17.2m under the stewardship of chief executive Clive Nathan.
In addition to the soft market and stalling economy, the decline in earnings may be linked to the loss of experienced account executives and managers. Towergate has lost senior staff in locations including Aberdeen, Glasgow and Edinburgh in the past two years.
Although the consolidator has moved quickly to replace lost staff, and even boosted numbers in regions such as Scotland, it will take time for new personnel to build their accounts.
The deteriorating results are a challenge for chief executive Mark Hodges because a lack of growth will make it more difficult to reconcile the group’s £654.6m debts.
Towergate is paying 8.5% interest on a £230m bond due in 2018 and 10.5% interest on a £290m senior note due in 2019. The firm also has a £320m bank loan facility.
In normal times, investors might buy into a Towergate flotation, with a view to issuing a new bond to pay off the old debts.
But, according to sources in the capital markets, in the current fraught market conditions, investors won’t commit to highly leveraged private equity-backed firms unless there is a clear path for debts to be paid off.
Towergate has breathing space to wait for an economic upturn because of the seven- and eight-year maturity of its bonds.
Meanwhile, there have been further staff changes. Retail director Jon Walker took on a new role, created by Hodges in a bid to retain him in the organisation, Insurance Times understands.
Hodges created the new role of integration director to keep Walker, although it is a holding position of an unspecified time period.
The business suffered a separate blow when broking divisional director Dave Partington left last week. The departure was agreed by mutual consent.
Talking points …
● Towergate chief executive Mark Hodges is talking about growth, but where will it come from? The company is being dragged down by declining earnings in the broking division. But there is around £90m for acquisitions.
● Does Towergate have a plan B? The big idea is flotation, but if the markets remain unsettled and investors continue to be wary of debt-laden companies, what options does the company have in terms of converting its shares into cash?
● Does Hodges intend to float the company in its current form or sell off parts of the business prior to flotation?