Compensation bill for financial products mis-selling to hit Towergate cash flow - Fitch

The compensation payment that Towergate is expecting to pay for mis-selling financial products could have a negative impact on its ability to raise cash until the end of 2016, Fitch has warned.

The rating agency has assigned a long-term issuer default rating of B- to TIG Finco, the entity that issues bonds for the just restructured Towergate. Fitch has also awarded the broker’s rating a ’stable’ outlook.

This rating comes as the entity issued its new bonds today, following the completion of Towergate’s acquisition by a consortium  of unsecured creditors led by the JP Morgan-backed Highbridge fund and the restructuring of its debt.

Under the transaction, 80.6% of the Towergate group has been transferred today to the consortium of unsecured creditors, while Towergate’s secured creditors will retain 19.4% of the company.

The group has issued £75m super senior secured notes and £425m senior secured notes which are due in 2020.

The super senior secured notes have been assigned a BB-/RR1 rating, while the senior secured notes have been given a B/RR3 rating. Fitch issues RR ratings to companies that are in recovery, like Towergate, following its restructuring process.

Cash flow pressures

Fitch said the ratings reflected the continued pressure on cash flow generation and Fitch’s expectation that the company’s scope for organic growth may be limited given the challenging market environment that it is operating in.

Towergate has said it may have to pay compensation of up to £85m for mis-selling financial products through its Towergate Financial division. It is working with the FCA on the sale of enhanced transfer values (ETV) and unregulated collective investment schemes (UCIS).

The ratings agency said: “Contributing to a negative free cash flow profile are payments Towergate might have to pay as redress, in respect of past advice provided by Towergate Financial on ETVs and UCIS.

“Fitch believes that these restructuring and compensation costs could result in Towergate’s free cash flow profile remaining negative until end-2016.”

Prevailing market conditions, combined with the disruption caused by the transformation plan are also expected to continue to constrain the company’s ability to grow organically in 2015.

Fitch said a risk still remained for the broker in extracting the required operational efficiencies to improve profitability and reduce leverage over the next two years.

Liquidity improvements

On a more positive note, Fitch said it expected Towergate’s overall liquidity position to improve, driven by a combination of lower interest payments and falling costs associated with the company’s transformation plan.

Under the new restructure, Towergate’s interest payments have been cut by more than half to £44m from £94m per year.

Fitch said: “The non-amortising profile of both series of notes will also help preserve cash in the business. However, cash restructuring costs continue to represent a material use of cash, followed by interest on the notes and capex.

“As cost savings materialise and the strategic business unit becomes fully operational, Fitch expects reduced operating costs and increased sales revenue to contribute to improved organic performance.”