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Fitch Downgrades Towergate's IDR to 'B-'; on Rating Watch Negative
November 20, 2014 / 9:58 AM / 3 years ago

Fitch Downgrades Towergate's IDR to 'B-'; on Rating Watch Negative

(The following statement was released by the rating agency) LONDON, November 20 (Fitch) Fitch Ratings has downgraded Towergate Finance plc's (Towergate) Long-term Issuer Default Rating (IDR) to 'B-' from 'B' and placed the rating on Rating Watch Negative (RWN). Towergate's senior secured notes due 2018 have been downgraded to 'BB-'/'RR1' and senior notes due 2019 downgraded to 'CCC+'/'RR5'. They have also been placed on RWN. The downgrade and RWN reflects growing uncertainty concerning Towergate's ability to improve short-term operational cash flow and maintain sufficient liquidity moving into 2015. Free cash flow has remained under sustained pressure during 2014, primarily due to costs incurred as part of the group's strategic reorganisation. Organic revenues declined in the third quarter of 2014 (3Q14) while Towergate's ability to grow through acquisitions looks increasingly challenged, given the limited sources of capital available to the company. KEY RATING DRIVERS Tightening Liquidity and Cash Flow With the revolving credit facility (RCF) being fully drawn as of 30 September 2014, the company will have to resort to alternative liquidity sources, including assets sales, to cover any upcoming short-term liquidity needs. Should the current investigations by the Financial Conduct Authority (FCA) result in a material negative cash impact for the group, cash flow and liquidity will come under further pressure. Towergate reported a net cash outflow of GBP59m for the nine month period ended 30 September 2014 driven by a combination of restructuring costs and poor operating performance. Continued Weakening of Credit Metrics A deterioration in the group's adjusted September 2014 latest 12 month (LTM) EBITDA to GBP131.9m has resulted in Fitch- calculated funds from operations (FFO) adjusted gross leverage exceeding 7.5x which is more commensurate with a 'B-' IDR. Fitch does not forecast any meaningful improvement in short-term credit metrics as Fitch expects the challenging pricing environment in the UK non-life insurance market to prevail. Heightened Execution Risk of Reorganisation Plan Fitch believes that the series of strategic measures taken by Towergate to rationalise and enhance its processes has some merits and continues to expect some cost-saving opportunities to materialise. However, the reorganisation is progressing at a slower pace than expected and is having a more detrimental impact on trading results and short-term liquidity than expected. Approaches to Buy the Group Towergate has also announced that it has received approaches from parties interested in potentially acquiring the group. These approaches have not been factored in to the rating action taken today as they are still in the early stages of discussion. RATING SENSITIVITIES When resolving the RWN, Fitch will assess the current and prospective strength of Towergate's liquidity position. If liquidity does not improve through a combination of improved operational efficiencies arising from the strategic reorganisation plan as well as a return to positive organic growth, the IDR could come under further pressure. Contact: Primary Analyst Graham Coutts (Insurance) Associate Director +44 20 3530 1654 Fitch Ratings Ltd. 30 North Colonnade London E14 5GN Secondary Analyst Ishani Goonasekera (Leveraged Finance) Associate Director +44 20 3530 1509 Committee Chair Raymond Hill (Corporates) Senior Director +44 20 3530 1079 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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