OREANDA-NEWS. December 15, 2015. Fitch Ratings has revised the Outlook on TIG Finco PLC's (Towergate) Long-term Issuer Default Rating to Negative from Stable and affirmed the IDR at 'B-'. Fitch has also affirmed Towergate's GBP75m super senior secured notes and GBP425m senior secured notes due 2020 at 'BB-'/'RR1' and 'B'/'RR3' respectively.

The Negative Outlook reflects Towergate's underperformance against a number of Fitch's negative rating sensitivity metrics, including leverage, free cash flow (FCF) and EBITDA margin. Fitch believes there is significant execution risk associated with the implementation of Towergate's strategic plan due to tightening liquidity and continued pressure on FCF. Nonetheless, newly appointed management has only recently started implementing its turnaround plan and the rating actions are based on Fitch's rating case, updated for 3Q15 reported results, not new forward guidance from the company.

The Outlook could be revised back to Stable if the plan delivers stabilisation and improvement in cash generation and metrics return towards 'B-' medians for the sector.

KEY RATING DRIVERS
Execution Risk
Towergate has a new management team in place. Fitch views the experienced new management team favourably but believes that significant execution risk still remains in extracting the required operational efficiencies to improve profitability and reduce leverage over the next two years. Fitch expects significant restructuring costs to continue into 2016 due to further cost-saving initiatives and investment in IT platforms.

Weak Deleveraging Profile
If the new strategic plan is not implemented effectively, Fitch believes that funds from operations (FFO) adjusted gross leverage could remain above 7.5x and FFO fixed charge coverage below 1.5x over the next two years, metrics more in line with 'CCC' rated peers. Material deleveraging is not forecast, as the challenging operating environment in the UK non-life insurance market persists.

Tightening Liquidity Profile
Fitch believes that despite the reduction in interest costs, the continued decrease in earnings is starting to put pressure on liquidity. Continuing earnings pressure across all divisions coupled with the challenging market environment has resulted in a tightening liquidity profile. The company does not have access to alternate committed sources of liquidity. The new capital structure does not include an revolving credit facility (RCF) for additional liquidity, and the possibility of further asset sales remain limited as non-core assets were sold prior to the financial restructure in March 2015. Financial flexibility therefore remains constrained.

Negative Free Cash Flow
The primary use of cash is interest payments, with working capital needs low. Cash outflows are expected to continue, with low earnings growth and a high cost base likely to keep FCF negative over the rating horizon. Further contributing to a negative FCF profile are payments Towergate might have to pay as redress, in respect of past advice provided by Towergate Financial on enhanced transfer values (ETV) and unregulated collective investment schemes (UCIS). Fitch believes that these restructuring and compensation costs could result in Towergate's FCF profile remaining negative until end-2017.

Leading UK Non-Life Intermediary
Despite the recent financial distress and weakened operating performance, Towergate continues to maintain its leading position as an independent insurance intermediary in the UK, albeit at lower margins. It continues to maintain its relationship with leading insurance providers and has a wide distribution platform and significant underwriting capacity in the niche segment of the personal and SME commercial non-life insurance market.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Organic revenue remaining flat for 2015-2017.
- EBITDA margin also remaining flat in 2015-2017, with only a modest improvement over the rating horizon.
- Capex and restructuring cash outflows as per management guidance.
- FFO adjusted gross leverage increasing towards 10x by 2016 before easing from 2018 onwards, driven by reduced costs associated with the transformation plan and the running off of costs associated with UCIS/ETV.
- Liquidity tightening during 2015-2017.

RATING SENSITIVITIES
Future developments that could lead to downgrade include:
- The need to access additional credit facilities to meet liquidity needs.
- FFO adjusted gross leverage remaining above 7.5x and FFO fixed charge cover remaining below 1.5x on a sustained basis and sustained negative FCF.
- Lack of improvement in EBITDA margin, suggesting no efficiency gains realised from the restructuring.

Future developments that could lead to a revision of the Outlook to Stable include:
- Upward momentum in EBITDA to a level where cash flow generation supports business needs.
- Evidence of financial metrics coming back into line with 'B-' peers, such as FFO fixed charge cover above 1.5x and FFO adjusted gross leverage below 7.5x on a sustained basis.

LIQUIDITY
Towergate's capital structure comprises super senior secured notes and senior secured notes. The super senior secured notes are pari passu with the senior secured notes, but rank first upon the application of proceeds upon enforcement.

Both series are bullet maturities and long-dated, with repayments commencing in February 2020. 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.

Other sources of liquidity remain limited and the new capital structure does not contain a RCF. However, there are allowances for additional uncommitted credit facilities in the bond indentures.

FULL LIST OF RATING ACTIONS
TIG Finco PLC
-Long-term IDR: affirmed at 'B-'; Outlook revised to Negative from Stable
-Super senior secured notes: affirmed at 'BB-'/'RR1'
-Senior secured notes: downgraded to 'B-'/'RR4'