How will Towergate deal with its debts?

There are two sides to the Towergate story. The first one, is about how management will keep the business performing steadily in difficult market conditions. The second, more long-term part of the equation, is about dealing with its debts, which now amount to £646.1m.

Let’s firstly, look at how Towergate performed in 2009.

Towergate points to earnings, before, interest, tax, depreciation and amortisation (EBIDTA) as a better measurement, which increased from £112m to £117m.

The EBIDTA result is ‘creditable’, as chairman Peter Cullum describes it, in very tough trading conditions.

Is EBIDTA a fair accounting measurement, after all, the banks seem happy with it?

Towergate accounts were marked down £44.5m on amortisation and £13.7m depreciation in 2009m, which were significant contributers to the bottom line loss of £28m. But that’s not money actually hard cash going out of the company.

The real money going out the company is the interest payments which stand at £52m.

Towergate would say that is something it is easily capable of servicing.

It’s actual earnings were £117m, which is more than twice it has to pay on the £52m interest.

It means Towergate’s cashflow is good and it has money to play with. So what’s the all the fuss about?

If that’s Towergate’s argument, then it has to accept the corollary. The firm still has huge debts overhanging the company which need to be repaid.

The companies accounts show total debt of £646.6m, and £452m of that, has to be repaid between two and five years.

Do chairman Peter Cullum and chief executive Andy Homer want to have to continually go cap in hand to the banks to renegotiate the banking covenants? How much patience do the creditors have?

That’s is why the flotation, planned for 2012, is so important. The management have not talked in detail about their plans following the flotation.

Presumably, the proceeds of the flotation would be used to pay down the debt, with some cash to spare.

In the meantime, Towergate has been looking at a bond refinancing to stretch back pay day to around 2017.

If successful, then Towergate could have breathing space on the flotation date and push it back depending on how juicy the markets are looking.

Whatever it does, the flotation day will surely come at some point and Towergate will have to make sure its public relations and investor relations are on the ball.

Many in the City will ask difficult questions, such as: is the broking part of your business, built on high commission and high volumes, sustainable over the long term? Do you have a plan B if the landscape changes?

Many independent brokers, feeling they lost business to the consolidator model, would like to see the Towergate flotation fail.

But what good would that do the reputation of the industry, especially in the wake of the banking disasters?

What confidence would that give going forward to investors interested in buying brokers both large and small?

The whole insurance industry will be watching the flotation closely. Lets hope it is a successful one.