Move comes as Fitch puts company on negative outlook over its debt v earnings ratio

Mark Hodges

Towergate began its fightback this week with the appointment of former Brit finance chief Scott Egan and plans to embark on a spending spree with a number of new acquisitions.

The week began with Towergate’s ability to pay its debts being put on negative outlook by Fitch, as the rating agency suggested that the consolidator would need to make more acquisitions to avoid a downgrade from B to B-.

However, Insurance Times understands that Towergate will tap its £100m war chest from private equity backer Advent to acquire between five and 10 firms over the next two to three months.

Towergate also strengthened its management team by poaching Scott Egan from Brit. Egan became Brit’s finance chief in January 2011, having previously worked as Zurich’s UK finance chief for four years.

Egan’s experience of working with blue chip insurers on the stock exchange will help Towergate as it works towards its planned flotation. Egan will replace Ian Patrick.

Towergate chief executive Mark Hodges said: “Scott brings impressive executive experience from well-respected and listed companies, and has helped drive strategic change within some of Europe’s largest insurance businesses.”

Hodges, who arrived last October, is working relentlessly on ways that Towergate can maximise revenues by getting its broking, underwriting, software and broker network firms to work more closely together.

Egan’s appointment means that Hodges is gradually getting his management team in order. He has appointed Michaeal Rea to head Towergate Retail and Towergate Financial, Graham Barr as CCV chief operating officer and Jonathan Walker as integration director.

Hodges is understood to believe that Towergate is keeping with its banking covenants and he is comfortable with the issurer default rating (IDR) of B, which is considered “highly speculative” by Fitch.

Towergate has a £520m corporate bond, due for repayment in 2018 and 2019, and £410m of bank debt facilities that expire in 2017. If Towergate’s debts exceed six times its underlying earnings, Fitch is likely to exact a downgrade.

Total gross leverage for the 12 months to September 2011 was 6.6 times earnings before interest, tax, depreciation and amortisation (EBITDA), compared with Fitch’s expectation of 5.8 times. Fitch is also concerned that challenging market conditions are weakening Towergate’s profits in relation to its debts. Nine-month EBITDA in 2011 was £100.2m, 9% down on 2010’s £109.7m.

The Fitch note sparked a fierce rebuttal by outgoing financial chief Patrick. He said: “Towergate is a business of significance and interest in the investment community and, as such, it is the only rated broker in the UK that does not have a public listing of its shares.

“Towergate’s competitors in the UK are not rated by agencies such as Fitch, Moodys or Standard & Poor’s. However, within the global pool of similar brokers based in the USA, it is worth noting that all but one is rated by Moodys at B and B-. With its B rating, Towergate is comfortably within the expected range.

“Towergate is financially rock solid. However, taking into consideration the wider economic conditions that have impacted the insurance intermediary market, the conclusions reached by Fitch are unsurprising.

“While under an obligation to our bondholders not to discuss it in detail, we are satisfied with our 2011 performance and very excited by plans for 2012.”

There were also some words of encouragement in the Fitch analysis. It said Towergate’s current IDR rating continues to be supported by the broker’s leadin position in the UK non-life broker market, wide product distribution platform, and expertise in niche SME commercial and personal insurance lines.

We say …

● Scott Egan is a seasoned chief financial officer with experience of listed blue chip insurers. His arrival is a coup for Hodges and Towergate. However, this is surely yet another piece of bad news for Brit, whose UK arm has been for sale for months.

● Hodges will have to be on his guard to fight against swoops from rival brokers such as Gallagher. Losing star sales staff in a soft market and stalling UK economy is a recipe for disaster.

● As well as acquisitions, Hodges will have to think up ways to ramp up organic revenues. Towergate Underwriting seems to be succeeding while the other divisions hit the buffers. One possiblity could be to expand the underwriting arm with new hires and get its brokers to shovel in more business.

Pass notes: Towergate

What is this Fitch rating about then?
Fitch is a rating agency that investors rely on to analyse Towergate’s ability to honour its debts. Fitch currently has Towergate rated as B, which is highly speculative, and has threatened a further downgrade. A downgrade to B- would put Towergate dangerously close to the CCC category where, according to Fitch, “default is a real possibility”.

Isn’t Towergate worried?
Not really. Towergate points out that several of its rival brokers are also in this territory. Towergate’s management believes earnings can cover interest payments on the bonds, which are due for repayment in 2018 and 2019. The bank facility arrangements are due to expire in 2017.

So how will Towergate get rid of its debts?
That’s the million dollar question, or should we say billion dollar question, since we’re talking about Towergate’s debts. One possibility could be for Towergate to ramp up earnings, trim its debts prior to flotation and roll over the remaining debts. Institutional investors are unwilling to back heavily indebted private equity firms for flotation, but that could change.

Will Towergate be around in its current form 10 years from now?
The truth is, nobody really knows either way. But it’s sure to interest the market for some years to come.

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