Termsheet: Towergate – ‘too much debt, and that’s a fact’

“Factually, the company had too much debt. “This was the view of Towergate’s current chief executive Scott Egan, who was parachuted into the role as the company underwent a debt restructuring in February. It was a blunt but succinct assessment of why UK insurer Towergate got into financial difficulties that handed ownership of the firm to its creditors. 

For a short period, it looked as if it could be a case of both too much debt and too many creditors. Initially, the company came to an agreement with its secured lenders in a deal that would have seen unsecured noteholders wiped out. That agreement, which 70 percent of secured creditors had already signed up to through a lock-up agreement that precluded supporting another deal, was announced on 2 February. 

In the background however, the unsecured creditors were working to overturn the secured creditor’s deal and seal an agreement that might eventually mitigate some of their losses through an equity stake in the restructured business. 

Luckily for Towergate, the negotiations were not drawn out. The unsecured creditors, led by Highbridge Principal Strategies, KKR and Sankaty Advisors, moved quickly, opting to kill the secured creditors’ deal by putting up more money. With some cash repayment and a minority equity stake on the table for the secured creditors in the unsecured creditors’ deal, the two classes of creditors came to an agreement that also worked for the Towergate board of directors. 

Four days after the first deal was announced, on Friday 6 February, the unsecured creditors emerged as the not-quite-triumphant ‘winners’ in the battle between the two proposals. While the unsecured creditor committee may have had its restructuring proposal adopted, unsecured creditor losses are total. The biggest players have had to double down, injecting fresh capital into the firm, much of which will go to pay off secured creditors. Reports suggest that, for KKR and Highbridge, this ‘loan-to-own’ outcome is was what they were seeking after buying into the heavily discounted unsecured debt in the secondary market. 

Without a significant turn-around at the company though, they will face further losses through their cash injection – most of which went to bail out the secured creditors who threatened to cut them out of any recoveries, equity or otherwise.

THE DEALS 

Towergate turned to financial advisors to hammer out a restructuring deal when it could no longer fully service its £1.05 billion ($1.53 billion; €1.45 billion) net debt pile and net leverage had reached 9.6x.

The first – secured creditor – restructuring proposal would have seen ownership transfer from Towergate’s existing shareholders – private equity firm Advent International as well as management, staff and the firm’s founder Peter Cullum – to the secured creditors, with unsecured creditors receiving neither equity nor new debentures. The secured creditor group was set to convert all its claims into a 100 percent equity holding, £375 million of new 8.5 percent senior secured notes and £150 million of unsecured subordinated 12 percent payment-in-kind notes. When the proposal was made public, around 70 percent of the secured creditor group had signed up to the deal. 

The proposal would have reduced Towergate’s net debt by around 60 percent to approximately £370 million and cut net leverage to 3.4x. 

Under the final, unsecured creditor proposal, the majority of the equity, 80.6 percent, was transferred to the unsecured creditors, which agreed to fund a £300 million cash injection. Highbridge, which was the main driving force behind the unsecured proposal, agreed to underwrite £50 million of the overall £300 million. Reports suggest Highbridge put up £240 million while KKR and Sankaty contributed the remaining £60 million. Other qualifying creditors were invited to subscribe to that capital raise. 

Highbridge also backstopped £75 million in new super senior notes issued at a four percent original issuer discount. The 7.5 percent notes mature in 2020 and have a one percent Libor floor. The company can use the debt for working capital, capital expenditure and general corporate purposes.

For the senior secured creditor group, the restructuring offered a 19.4 percent equity stake, a £250 million cash repayment of monies owed, with remaining outstanding obligations swapped into a new senior debt instrument. The £425 million, 8.75 percent notes mature in March 2020. The deal represented a recovery rate of 100 percent for the senior secured lenders, broken down into 59 percent new debt exposure, 35 percent repayment, with the remaining 6 percent covered by the equity stake. 

Towergate’s lenders declined to comment on the deal. 

WHAT NEXT?

Manoeuvring creditors into a restructuring deal usually takes some time. So getting a deal locked down sufficiently to announce it and then four days later have another deal in place to overturn it, is quite an achievement. 

“We wanted to move quickly because the longer that these situations go on, the more debilitating it becomes to staff, to partners, to stakeholders,” says Egan, when explaining why the deal was done so quickly. He wouldn’t want to have to do it again, he adds. 

Egan is an interim CEO. He will be in place for around 12 months while David Ross, who was hired from Arthur J. Gallagher to take the top job at Towergate, sits out his gardening leave. Before Ross takes the wheel, Egan says he has set himself four main jobs. The first, wrapping up the restructuring, is pretty much done, with the scheme of arrangement approved by the UK courts on 27 March. 

The second is to communicate with staff and reenergise the company. When Egan spoke to PDI in April, he had already engaged with 3,000 of the firm’s 5,000 employees. The third, highly significant task is to focus the company’s attention on organic growth. Debt may have been Towergate’s downfall, but it was accumulated over a multi-year buying spree as the broker business built scale through acquisitions. 

Egan’s fourth and final job is to complete the firm’s major change programmes which include moving all the SME business out of the broking arm and into a new centre in Manchester as well as centralising all the finance operations in a couple of locations to allow the smaller offices to focus on sales. These changes have meant job losses at the company, but that side of it is mostly complete, says Egan. 

WHY NOW?

The Towergate restructuring was very high profile. It was known to be struggling as results had suffered and the firm reported losses that many observers blamed on the cost of debt refinancing. Its spree of acquisitions hadn’t resulted in strong synergies and the centralisation of group business functions taking place now appears overdue. 

A number of debt investors that have invested in the firm down the years told PDI that at various points they were facing losses but each time they were refinanced out just in time. In 2011, the company executed a $1 billion bank and bond refinancing deal that cut off speculation about its future. It managed to push out maturities again in 2013 even while reporting a loss. 

For debt investors, the real question about the Towergate restructuring is why did it happen now? Markets continue to be liquid and interest rates remain exceptionally low. There’s always an element of luck with these things and failing to properly integrate acquisitions certainly didn’t help the company, but investors must look at the most highly levered names in the market in a different light after Towergate. 

With leverage creeping up across the spectrum and liquid markets giving borrowers the strength to dilute protections, now is not the time to ignore the associated risks.