Moody's downgrades Towergate over debt

Moody’s has downgraded Towergate’s corporate family rating from B3 to B2 because of “significant” levels of debt and limited earnings. 

Moody’s also lowered Towergate’s probability of default rating to B3-PD from B2-PD and changed the outlook for the group from negative to stable.

The rating agency issued the downgrade after Towergate reported a net loss of £4.7m for 2012.

“Moody’s B3 rating reflects a combination of Towergate’s strong UK insurance broker market presence and its good earnings before interest, taxes, depreciation and amortisation (EBITDA) profitability levels compared to similarly rated peers,” said Moody’s.

“However, the rating downgrade reflects the continued significant levels of financial indebtedness of the Towergate Group and limited EBITDA earnings coverage, which have not significantly improved in recent years, on a comparable basis.”

Since March 2010, Moody’s had maintained a negative outlook on the group’s ratings, “reflecting the persistently high levels of debt leverage”.

The senior secured and senior unsecured instruments issued by Towergate Finance plc have also been downgraded by one notch, to B1 and Caa2 respectively, with the outlook changed from negative to stable, in line with the outlook on the CFR.

On a consolidated basis, Towergate as at year end 2012 now reports under IFRS, as opposed to UKGAAP. In its annual results published yesterday, Towergate reported total fee and commission income of £439m (2011 IFRS restated: £420m), an operating profit of £106.8m (2011 IFRS restated: £107.4m) and a net loss of £4.7m (2011 IFRS restated loss: £23.4m), with the bottom line results benefitting from Towergate no longer having to annually amortise its intangible assets under IFRS.

While Moody’s debt/EBITDA metrics improved from 9.0x as at the end of 2011 to approximately 7.9x as at the end of 2012, it said the majority of this improvement relates to accounting policy changes, namely the conversion to IFRS, with the restated 2011 IFRS Moody’s debt/ EBITDA metric being approximately 8.1x and the remainder largely from Ebitda growth.

Further, Moody’s noted the EBITDA coverage of interest at around 0.9x as at YE 2012 continues to remain “somewhat below our expectations for a B2 rated issuer”, having increased modestly from 0.7x as at YE 2011.