02 February 2015

Towergate Insurance (“Towergate”, the “Company” or collectively with its subsidiaries, the “Group”) is pleased to announce that it has today entered into a binding agreement (the “Agreement”) with its senior secured creditors to implement a financial restructuring and recapitalisation of the Group.

Under the terms of the Agreement, Towergate will emerge with a substantially deleveraged capital structure, together with additional liquidity resources with which to deliver its strategic plan.

The Agreement has received the unanimous approval of the Restructuring Committee of the Board and in excess of 70% in aggregate of the Group’s senior secured creditors.

The Company is aware that discussions between senior secured and senior unsecured creditors are ongoing to determine the terms on which the senior unsecured creditors may participate in the restructuring. The Company will make further announcements as appropriate.

The Company also announces today the Group’s preliminary consolidated results for the year ended 31 December 2014.

Commenting on the restructuring, Alastair Lyons said:

“This ends a long period of uncertainty for Towergate and lays the foundations for a strong future. With a very substantial reduction in our existing debt burden and £75 million of new investment we have what we need to be able to realise our strategic ambitions.

This action by our lenders, who now take over the ownership of the Group, makes clear their confidence in Towergate as a market leader and in our people’s ability to create significant value from that position.

That is a confidence that has been shared by all those of our insurer partners, suppliers and clients who have supported us through the difficult period from which we are now emerging – a confidence that we will now be able to repay.”

A spokesman acting on behalf of the Ad Hoc Committee said:

"We are pleased to announce our agreement to acquire the Towergate Group which provides for a substantially deleveraged capital structure and a new money facility to put the Towergate Group on a stable, long-term footing. Our agreement enables the Towergate Group to seize opportunities in the market while establishing the stability required to maintain the support of Towergate’s insurer partners, customers, suppliers and employees. We view Towergate’s employees as critical to Towergate’s future success and we look forward to working with them to strengthen Towergate's position as a market-leading UK insurance provider."

Highlights of the Agreement

Under the terms of the Agreement, senior secured creditors will convert all of their existing claims (including accrued interest until completion of the transaction) into £375 million of new senior secured notes, £150 million of subordinated PIK notes and 100% of the ordinary shares of the new holding company for the Group. Following the transaction, net senior debt will be reduced by more than 60%.

Additionally, senior secured creditors have agreed to provide £75 million of new finance in the form of super senior notes which will be funded at completion.

The Agreement will result in the transfer of 100% ownership in Towergate to its senior secured creditors.

This represents a very positive outcome for Towergate, for the following reasons:

  1. Substantial debt reduction
    Towergate will emerge with consolidated net senior debt of approximately £370 million, including the £75 million new super senior notes, and net leverage of 3.4x, compared with net debt and leverage prior to the proposed transaction of £1.05 billion and 9.6x respectively.
  2. Additional liquidity to fund the implementation of its strategic plan
    The Agreement includes the provision of new super senior notes for £75 million which will be fully funded at completion. The super senior financing will be used for working capital, capital expenditure and general corporate purposes including the completion of the change programme and coverage of costs associated with implementing the transaction.
    The new funding will be underwritten by certain members of the ad hoc committee of senior secured lenders (the “Ad Hoc Committee”), but will be offered to all senior secured creditors pro rata to their existing secured debt holdings (assuming certain investor qualification criteria are met).
  3. Extended debt maturities and no financial maintenance covenants
    The new super senior and senior secured debt financing will have maturities of four and five years respectively, giving the Company an extended runway to deliver its strategic plan. Neither facility will have financial maintenance covenants, providing additional financial stability to the Company in the medium term.
  4. Tried and tested implementation route
    The Agreement will be implemented by way of a scheme of arrangement under the UK Companies Act 2006. The transaction is subject to customary regulatory approvals and is expected to complete before the end of March 2015.
    The transaction will not affect any of the operating subsidiaries of the Group, all of which will continue to trade in the ordinary course. The transaction only affects holding companies in, and provides additional liquidity resources for, the Group.
    The board will be governed by a majority of independent non-executive directors, alongside the CEO and CFO, and certain shareholder representatives. Towergate’s governance framework will remain unchanged.
    The process of identifying a new CEO to succeed Mark Hodges who resigned in October last year will now be resumed. Alastair Lyons will continue for the time being in the role of Interim Executive Chairman.

Appendix

Key terms of the restructuring*

Subject to the completion of the scheme of arrangement and other approvals, the transaction will involve secured creditors taking ownership of the Group through the exchange of existing secured debt for new debt securities and equity. In consideration for each pound (£) of existing secured debt principal**, senior secured creditors will receive:

  • 52p of new senior secured guaranteed debt securities (“New Senior Notes”),
  • 21p of structurally subordinated holdco PIK debt (“HoldCo PIK Notes”),
  • 27p in ordinary equity, stapled to the HoldCo PIK Notes, and
  • The right to pro rata participation in the new super senior secured and guaranteed notes (“New Super Senior Notes”), assuming certain investor qualification criteria are met.

Following completion of the transaction, senior secured creditors will own 100% of each of the ordinary shares, the HoldCo PIK Notes, the New Senior Notes and the New Super Senior Notes.

The Agreement envisages that the interest coupons due on existing debt in February 2015 (both senior secured and senior unsecured) will not be paid.

The key terms of the new securities to be issued to secured creditors under the Agreement are summarised below:

New Super Senior Notes

The New Super Senior Notes will have a face value of £75 million and will be issued in full on closing at a 4% Original Issuer Discount. They will mature in March 2019 and pay annual cash interest of Libor + 7.5%, with a 1% Libor floor. The proceeds will be available to the Group for working capital, capital expenditure and general corporate purposes including the payment of transaction-related costs.

The New Super Senior Notes will be subject to customary high yield covenants related to incurrence of indebtedness, payment of dividends, sale of assets, entry into affiliate transactions and other customary limitations.

New Senior Secured Notes

The New Senior Secured Notes will be issued in exchange for all of the existing senior secured debt and will have a face value of £375 million. They will mature in March 2020 and pay a cash coupon of 8.5% per annum. This reduction in debt will represent a c.50% saving to the Company’s current annual senior debt interest expense, allowing for more free cash flow to be reinvested in the Group.

The New Senior Notes will be subject to customary high yield covenants related to incurrence of indebtedness, payment of dividends, sale of assets, entry into affiliate transactions and other customary limitations.

HoldCo PIK Notes

The HoldCo PIK Notes will have a face value of £150 million, will be unsecured, and will be permanently stapled to the ordinary equity. They will mature in 2025 and will accrue “Payment-In-Kind” interest at 12% per annum.

* For more information, the form of the lock up agreement and term sheets relating to the proposed transaction will be made available on the Company’s website

** Calculation based on principal outstanding, excludes accrued interest

Preliminary financial results for Towergate Holdings II Limited for the year ended 31 December 2014

 

*See Notes to Financial Statements

Group highlights

  • As anticipated in the Company’s trading update on 23 December 2014, overall consolidated Group income for the year 2014 declined by 4% on 2013
  • Financial performance in 2014 continued to be impacted by the Group’s ongoing change programme. Towergate expects the impact of the change programme on trading performance to continue in the first half of 2015. The cost and income benefits from the change initiatives are expected to emerge progressively across 2015
  • Additionally, as highlighted in the Company’s December trading update, a number of trading deals were not finalised with insurers before the year end owing to the uncertainties affecting the Group. Excluding the impact of these trading deals, consolidated organic income for 2014 declined by 5% compared to the previous year
  • In the fourth quarter, again in line with the December trading update, organic income has maintained broadly (within 1%) the same level of year-on-year decline as experienced in the third quarter, primarily reflecting the ongoing impact of the change programme in Broking
  • In summary, the reduction in EBITDA during the year reflects the combined impact of income decline and increased expenses, the latter of which relates entirely to the additional costs from acquired businesses
  • The increase in capital expenditure in 2014 principally reflects the incremental cost associated with the implementation of the change programme, in particular in relation to the establishment of the new Small Business Unit in Manchester, and ongoing investment in both the Leeds centre for client and insurer money and the Maidstone financial accounting centre
  • Available cash includes proceeds from the disposal of Haywards Aviation which were received in December 2014

Divisional Performance*

 

* See Notes to Financial Statements

Divisional highlights

  • Insurance Brokers – Income declined by 5% over the year. Excluding trading deals, income for the full year is 2% behind 2013 (YTD at Q3 2014: 0%) owing to the continued impact of the significant change programme. EBITDA declined by 32% over the year, driven by the decline in income, with cost savings expected to emerge during 2015 as the impact of the change programme takes effect. Results for 2014 include a full year’s contribution from Haywards Aviation, which amounted to £11m in income and £2m in EBITDA in the year
  • Underwriting – Income growth of 4% is driven principally by the successful integration of the Arista acquisition which completed in April 2014, offset by a challenging market environment for new business. EBITDA has been impacted by lower initial margins in the Arista business, lower organic income and reduced trading deal income in the fourth quarter
  • Direct – Income for the year is in line with 2013, reflecting the offsetting factors of the successful integration of Footman James and a reduction in trading deals. EBITDA margin has been impacted by lower initial margins in the Footman James business and unchanged organic expenses, with savings expected to emerge in 2015 from the site consolidation programme executed in 2014
  • Paymentshield – Business performance was impacted by the ceasing of historic advanced commission (albeit this is a non-cash adjustment). Adjusting for the £8m benefit of this in 2013, income and EBITDA in 2014 were 1% and 2% behind respectively
  • Network – The small decline in income for the year results in a larger impact at the EBITDA level given the relatively fixed cost base of the division

Forward-looking guidance

  • Income growth
    - Given the ongoing impact of the change programme on Broking trading during the first half of 2015, the Company expects consolidated income to decline year-on-year at a similar rate as Q4-14. However, income in the second half of 2015 is expected to begin to recover as a result of the completion of the change programme and its resulting benefits, with group income broadly flat vs H2-14
    - Income is expected to grow steadily in the subsequent two years, returning by 2017 to levels achieved in 2013, excluding the c.£11 million of income contributed by Haywards (in 2014)
  • EBITDA margin
    - Increased costs associated with the completion of the change programme are expected to reduce the EBITDA margin by a further 1% in 2015 vs 2014
    - Thereafter, the Company expects the consolidated EBITDA margin to recover by c.1% per annum over 2016 and 2017
  • Capex
    - Following the end of 2014, the Company expects maintenance capex as a percentage of income to trend towards c.2.5% by 2017
  • Working capital
    - From 2015 onwards, change in working capital is expected to be negligible, with slight outflows linked to the projected income growth in 2016 and 2017
  • Exceptional items
    - FY14 was a transformational year for the Group with c.£41 million of cash exceptionals, mostly linked to the change programme. Further spend is also required in FY15 to complete the change programme such that the Company anticipates aggregate exceptional cash costs to be c.£23 million. The majority of these costs are expected to be incurred in the first half of the year
    - Other one-off payments which are expected to occur upon completion of the transaction total £39 million. These include certain one-off retention bonuses, lender committee fees and advisor costs
    - Furthermore, there are certain expected payments in relation to LTIPs and deferred consideration (relating to past acquisitions) which are triggered by a change of control. In aggregate, the maximum amount payable amounts to approximately £33 million
    - The Company expects a more normalised level of c.£5 million exceptional cash costs per annum in 2016 and 2017
  • Deferred consideration
    - In addition to the above, ongoing payments for deferred consideration not triggered by a change of control amount to c.£7m in aggregate, of which approximately 60% falls due in 2015
  • Acquisitions and disposals
    - The forward-looking guidance provided above does not include any assumed acquisitions or disposals, with the exception of a few small acquisitions that are expected to generate a non-material amount of EBITDA in Broker Network

* Notes to Financial Statements

  1. Unaudited results
    Consolidated results for 2014 are preliminary and unaudited
  2. Restatement of accounts
    2013 earnings have been restated to reflect a number of accounting adjustments and disposals made during 2013, to enable a like-for-like comparison
  3. Business unit transfers
    Divisional results have been restated following a number of small business transfers between divisions, to enable a like-for-like comparison

Update on ETV and UCIS investigations

Further to the updates provided in Towergate Holdings II Limited’s report to bondholders for the nine months ended 30 September 2014, Towergate continues to be in discussions with the Financial Conduct Authority (FCA) in relation to past advice provided by the Towergate Financial business on Enhanced Transfer Values (ETV) and Unregulated Collective Investment Schemes (UCIS). The independent file reviews for both investigations are ongoing. Customer contact, which will be a key factor in determining the extent of the Group’s redress obligation, is currently expected to commence in Q1 2015 and to be phased over an aggregate period of three years. Payment of any necessary redress is expected to occur over similar periods of time once the relevant customers have been contacted and the redress methodology has been agreed. Payments are expected to commence in Q3 2015.

Given the number of material uncertainties that continue to exist, it is not yet possible to make a reliable estimate of the Group’s ultimate liability in connection with these investigations. However, purely for the purposes of developing business plans and cash flow projections for the Group, Towergate has adopted a range of £65 million to £85 million in potential redress costs for ETV and UCIS in aggregate, excluding costs and expenses.

This internal range is derived from a set of assumptions based on currently available information. As explained above, in view of the material uncertainties all such assumptions are subject to change and Towergate can give no assurances as to whether its ultimate liability will be within this range or whether it will be lower or higher. The ultimate liability for ETV and UCIS may, therefore, be materially different to this range.

In addition, the foregoing does not include any recoveries that may be available either from relevant third parties or under the Group’s insurance arrangements, both of which the Group continues to pursue. The maximum recoverable amount under insurance arrangements is £12 million (subject to a deductible) in addition to costs, although the ultimate extent and timing of any recoverability remains uncertain.

Update on M&A process

Further to the approaches received by the Company in November 2014, the Company has run a wide-reaching sale process and has contacted multiple trade and financial buyers. Pursuant to this process, the Company received indicative bids for the Group, which were significantly within the value of the outstanding senior secured creditor claims.

Of these, a strategic bidder carried out substantial due diligence and made a proposal which valued the Company significantly within the senior secured debt on a net basis.  This non-binding proposal was to be paid in full in cash at closing and expires tomorrow.


Notes to Editors

Launched in 1997, Towergate is the UK’s largest independently owned insurance intermediary, generating more than £3 billion of pro forma gross written premiums across its companies and employing over 5,000 people across more than 100 UK offices.

Towergate is an important distribution channel for a significant range of insurance products and a key strategic partner for the UK’s largest insurers.

Towergate’s scale, customer insight and distribution relationships make it a unique business and a leader in the markets in which it operates. Its combination of distribution and underwriting gives it unparalleled consumer data and market insight.

Towergate operates across five core divisions:

  • Insurance Brokers – Towergate Insurance Brokers distributes specialised personal lines and products, and more general products aimed at SMEs through around 90 broking offices located across the United Kingdom
  • Underwriting – Towergate’s underwriting division is the UK’s largest MGA, providing specialist insurance products for brokers, without taking the ultimate capital risk. The MGA has over £750 million GWP under management
  • Direct – Towergate Direct sells specialist Personal Lines and SME products primarily through telephony and digital distribution channels
  • Paymentshield – Paymentshield is the leading provider of insurance products to mortgage brokers
  • Network – Broker Network represents the largest Network for insurance brokers in the UK. The brand remains the leading proposition in the market in terms of size and breadth of service with 600 Members

Presentation of financial and other information

Preliminary financial results for the year ended 31 December 2014 of the Company have been included in this press release. Because this financial information is preliminary and not prepared in accordance with international financial reporting standards, the numbers presented are estimates and could change. This financial information has not been reviewed by any audit firm and is inherently subject to modification during the preparation of financial statements.

This press release also contains statements that are, or may be deemed to be, forward-looking statements. In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the words ‘‘aims’’, ‘‘believes’’, ‘‘estimates’’, ‘‘anticipates’’, ‘‘expects’’, ‘‘intends’’, ‘‘may’’, ‘‘will’’, ‘‘plans’’, ‘‘predicts’’, ‘‘assumes’’, ‘‘shall’’, ‘‘continue’’ or ‘‘should’’ or, in each case, their negative or other variations or comparable terminology or by discussions of strategies, plans, objectives, targets, goals, future events or intentions. Many factors may cause the Company’s results of operations, financial condition, liquidity and the development of the industries in which it operates to differ materially from those expressed or implied by the forward-looking statements contained in this press release. These factors include among others:

  • the impact of current economic conditions on the Company’s results of operations and financial condition;
  • volatility or declines in the premiums on which the Company and its subsidiaries’ business commissions are based and declines in commission rates;
  • dependence on insurance companies providing the Company and its subsidiaries underwriting capacity and on third-party brokers, mortgage intermediaries and networks of mortgage intermediaries to distribute its products;
  • the impact of any adverse changes to relationships with brokers and mortgage intermediaries;
  • the impact of competition;
  • exposure to potential regulatory sanctions and fines;
  • the unpredictable nature of profit commissions;
  • legislative, taxation and regulatory changes, inquiries or enforcement actions, affecting the Company’s ability to operate or the profit generated from business activities;
  • exposure to potential liabilities arising from errors and omissions claims against the Company and its subsidiaries;
  • the impact of acting outside the scope of delegated authority from insurance companies;
  • interruption or loss of information processing systems or failure to maintain secure information systems and technological changes;
  • risks relating to the Company’s acquisition strategy;
  • risks of increased competition from consolidators limiting potential growth opportunities;
  • ability to retain senior management and underwriters, account executives, sales personnel and other client-facing employees;
  • ability to gain technological expertise and apply technology effectively;
  • the risk that the Company may have to write down the value of its goodwill;
  • the interests of shareholders;
  • risk relating to conflicts of interest and transactions with affiliated companies;
  • substantial indebtedness;
  • fluctuations in interest and foreign exchange rates; and
  • financial covenants.

The risks described above are not exhaustive. New risks can emerge from time to time, and it is not possible to predict all such risks, nor can the Company assess the impact of all such risks on its business or the extent to which any risks, or combination of risks and other factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, there should be no reliance on forward-looking statements as a prediction of actual results. Any forward-looking statements are only made as of the date of this press release, and the Company does not intend, and does not assume any obligation, to update forward-looking statements set forth in this press release. All subsequent written or oral forward-looking statements attributable to the Company or to persons acting on its behalf should be interpreted as being qualified by the cautionary statements in this press release. As a result, undue reliance on these forward-looking statements should not be placed.

No offer; important information

This press release does not constitute an offer to acquire or sell or a solicitation of an offer to sell or purchase any securities in any jurisdiction. In particular, this press release does not constitute an offer, solicitation or sale in the United States or any state or jurisdiction in which such an offer, tender offer, solicitation or sale would be unlawful.  The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933 and may not be offered or sold in the United States absent registration or an available exemption from registration under the United States Securities Act of 1933.

In relation to each member state of the European Economic Area (other than the United Kingdom), this press release and any offer of securities if made subsequently is directed only at persons who are “qualified investors” within the meaning of Article 2(1)(e) of the Prospectus Directive (Directive 2003/71/EC, as amended).

UK and US Tax considerations

Holders of senior secured debt are advised to consult their own tax advisors as to the UK, US federal income and any other tax consequences to them of participating in the transaction and of owning and disposing of the securities to be issued in the transaction. 

Media Queries Internal Contact

Kelly-Ann Knight - Corporate Communications Director

Towergate Insurance Limited

Email: kelly-ann.knight@towergate.co.uk

Investor Relations Contacts

Lois Hutchings - Group FP&A and Investor Relations Analyst

Towergate Insurance Limited

Email: Investor.Relations@towergate.co.uk