Towergate Holdings I
Plc
Financial Report
For the nine months ended September 30, 2014
£13,000,000 11.5% PIK Loan Notes due 2019
£31,000,000 10.0% PIK Loan Notes due 2019
Table of contents
Page
Recent Developments... 1
Presentation of financial and other information... 2
Summary unaudited pro forma financial information and other data... 4
Management’s discussion and analysis of financial condition and results of operations... 11
Recent developments
On March 28, 2014, there was a cash injection of £12.1 million into the Towergate Holdings I Group by its holding company via a share issue.
The Towergate Holdings I group has made seven acquisitions in the first nine months of 2014 consisting of two companies and five portfolios for consideration of approximately £20.3 million.
On April 17, 2014, the Towergate Group completed the acquisition of Arista Insurance, a leading UK commercial insurance provider specialising in property, liability and motor insurance. Arista is a high-quality MGA business, with a well-defined regional distribution network, which fits well within the Towergate Group strategy of acquiring specialist businesses with strong growth potential.
On August 29, 2014, the Towergate Group sold two companies, Folgate Insurance Company Limited (FICL) and FICL Holdco Limited to Anglo London Limited for consideration of £1.9 million. Folgate Insurance Company Limited is an insurance company in run off and as such operated outside Towergate’s main area of focus. During Q3 2013 Towergate identified that £15 million of client and insurer monies had been misallocated to an unrestricted account from November 2007 to January 2011. As soon as the misallocation was confirmed management transferred £15 million to the client money and insurer accounts. The FCA were notified and are now investigating this matter. These discussions are ongoing.
Towergate is continuing discussions with the Financial Conduct Authority (FCA) in connection with past advice provided by the Towergate Financial business on Enhanced Transfers Values (ETV). An independent file review of a sample of ETV cases was undertaken during Q3. This review has indicated that we currently hold insufficient evidence to support the suitability of some of the advice given and that some of the advice provided may not have been suitable. The independent file review will be extended to all 2,067 cases and customer contact will begin during Q1 2015, with a view to obtaining more customer specific information which will help to determine whether such advice was suitable and the level of any redress which may be due. This process will be ongoing during 2015. Towergate stopped advising on ETVs from Q4 2012.
In consultation with the FCA we have commenced an independent review of the customers whom the Towergate Financial business previously advised to purchase Unregulated Collective Investment Schemes (UCIS). To date we have identified the relevant customer population, which is in the order of 250 cases and agreed the review methodology with the FCA. The results of this review are expected in Q1 2015.
Towergate assess the value of the Networks business based on its value in use which included benefits to the Group from owning Networks. During Q3 the trading performance of Networks has been disappointing and was lower than previously forecast. The Board have concluded that the forecast profits of Networks will be lower than previously anticipated and therefore the value in use has been impaired by £54.9 million.
Trading income in Q3 2014 has been impacted by the significant level of organisational change across the business, specifically in our Broking business. Our trading performance, together with the impact of investment in change projects and costs incurred in relation to regulatory investigations, contributed to a net cash outflow before financing of £59 million for the 9 month period ended 30 September 2014 (as compared to £40 million for the 9 month period ended 30 September 2013), with the Group holding £42 million of unrestricted cash as at 30 September 2014 (as compared to £12 million as at 30 September 2013) and having fully drawn the £85 million Revolving Credit Facility (as compared to £43 million as at 30 September 2013). Consequently, there are uncertainties around operational cash flow and liquidity in Q1 2015, which the Group is seeking to address through disposals of small non-core businesses and other identified management actions. In addition, the Group is entering discussions around the renegotiation of the financial covenant under its Revolving Credit Facility. Whilst the Group is currently in compliance with this financial covenant, based on latest forecasts and the fact that the covenant level contractually tightens through to maturity of the facility, the Group may be unable to satisfy its financial covenant going forward and is therefore seeking to agree renegotiated terms
Towergate expect the impact of the change projects on trading performance to continue during Q4 2014 and into the first half of 2015. The cost and income benefits from the change initiatives are expected to emerge during 2015.
Towergate has received approaches from parties interested in potentially acquiring the Group, and it has consequently appointed Evercore Partners and Rothschild as joint advisers to support the evaluation of proposals.
On 17 October 2014, the Group announced that Mark Hodges resigned as Group Chief Executive Officer, a role he had held since September 2011. Until a replacement is appointed, Alastair Lyons has assumed the role of Interim Executive Chairman.
Presentation of financial and other information
This financial report is prepared in respect of Towergate Holdings I Plc, in connection with the issuance of PIK loan notes on February 11, 2011.
As part of these financial results, we are presenting unaudited pro forma financial information. Please see the section below entitled “Summary unaudited pro forma financial information and other data” for additional information on such pro forma information and a description of the assumptions used in creating such pro forma information. All financial information in these financial results that is presented as pro forma reflects U.K. GAAP. Since January 1 2013, the Group engaged in the following disposals of note:
On October 31, 2013, the Group disposed of Towergate Underwriting Commercial Property. On August 29, 2014, the Group disposed of FICL Holdco Limited
The unaudited financial information of the Towergate Holdings I group presented in this financial report and discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations has been prepared on a pro forma basis in order to present a two-year financial track record of the Towergate Holdings I group presenting its results as if each of the disposals referenced above were completed as at the start of the period, as described in further detail below:
The unaudited consolidated financial profit and loss account of the Towergate Holdings I group for the period ended September 30, 2014 has been prepared from the consolidated management financial information for the Towergate Holdings I group.
The unaudited pro forma consolidated financial profit and loss account of the Towergate Holdings I group for the period ended September 30, 2013 has been prepared from the consolidated management financial information for the Towergate Holdings I group, subtracting the results of TUCP and FICL for the period January 1, 2013 to September 30, 2013 and for the period ended September 30, 2014 the consolidated management financial information for the Towergate Holdings I group has been prepared, subtracting the results of FICL for the period January 1, 2014 to September 30, 2014.
We have not included financial information prepared in accordance with IFRS in this report. U.K. GAAP differs in certain significant respects from IFRS. These differences could be material to the financial information included herein. With the proposed change to accounting standards it is expected that we will move to IFRS reporting at some point in the future.
We have included in these financial results certain financial measures and ratios, including EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and certain leverage and coverage ratios that are not presented in accordance with U.K. GAAP.
In these financial results, references to “EBITDA” for the Towergate Holdings I group are to profit/(loss) on ordinary activities before interest payable and similar charges, tax, depreciation, amortisation of intangibles and group reorganisation costs. Accordingly, EBITDA can be extracted from the consolidated financial statements of the Towergate Holdings I group by taking profit/(loss) on ordinary activities and adding back interest payable and similar charges, tax, depreciation, amortisation of intangibles and group reorganisation costs.
References to “Adjusted EBITDA” for the Towergate Holdings I group represent EBITDA as adjusted for certain redundancy and restructuring costs, financing transaction costs, long-term incentive plan charges, business investment costs and regulatory costs.
EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and leverage and coverage ratios are not measurements of financial performance under U.K. GAAP and should not be considered as alternatives to other indicators of our operating performance, cash flows or any other measure of performance derived in accordance with U.K. GAAP. We are not presenting EBITDA-based measures as measures of our results of operations. EBITDA-based measures have important limitations as an analytical tool, and you should not consider them in isolation or as substitutes for analysis of our results of operations. Our management believes that the presentation of EBITDA-based measures is helpful to investors as a measure of our operating performance and ability to service debt. Our EBITDA-based measures may not be comparable to similarly titled measures used by other companies. Certain data contained in these financial results, including financial information, have been subject to rounding adjustments. Accordingly, in certain instances, the sum of the numbers in a column or a row in tables may not conform exactly to the total figure given for that column or row.
In these financial results we present segmental analysis. From time to time we make structural changes within the business and trading businesses may move between the reported segments. When this occurs we restate the financial information in respect of the corresponding prior year period to facilitate the discussion and analysis of the results.
Summary unaudited pro forma financial information and other data
Basis of Preparation
The profit and loss account data presented is based on unaudited pro forma consolidated financial information and other data for the three and nine months ended September 30, 2013 and on unaudited consolidated financial information and other data for the three and nine months ended September 30, 2014 and has been prepared on the basis of U.K. GAAP.
The Balance Sheet and Cash Flow information in this report are presented on a statutory basis from the consolidated financial statements of Towergate Holdings I Plc. This excludes TUCP from October 31, 2013 and FICL from August 29, 2014.
The adjustments made in order to present the unaudited pro forma consolidated financial information have been made based on available information and assumptions that management believes are reasonable. The unaudited pro forma consolidated financial information is for information only and does not purport to present what the results would actually have been had the disposals of TUCP and FICL occurred on the dates presented, nor should it be used as the basis of projections of the results of operations or financial condition for any future period.
(£ in thousands, on pro forma basis)
Quarter ended September 30
Nine months ended September 30
2013 2014 2013 2014
Profit and loss account data:
Group turnover... 108,913 105,239 331,100 327,843 Administrative expenses... (78,925) (83,488) (232,085) (250,254) Profit on ordinary activities before interest and amortisation... 29,988 21,751 99,015 77,589 Amortisation of intangibles... (19,180) (20,043) (57,840) (59,758) Impairment of intangible assets... - (54,874) - (54,874) Profit / (loss) on sale of business... - - (836) - Group reorganisation costs... (6,867) (7,927) (15,948) (20,803) Profit / (loss) on ordinary activities before interest... 3,941 (61,093) 24,391 (57,846) Other interest receivable and similar income... 483 234 1,405 625 Interest payable and similar charges... (24,927) (28,447) (74,637) (75,362) Amortisation of capitalised financing fees... (1,451) (1,418) (4,357) (4,226) Loss on ordinary activities before taxation... (21,954) (90,724) (53,198) (136,809) Tax on loss on ordinary activities... (226) - (3,838) - Loss on ordinary activities... (22,180) (90,724) (57,036) (136,809)
(£ in thousands, on statutory basis)
September 30
2013 2014
Balance sheet data:
Intangible assets... 1,357,876 1,243,259 Tangible assets... 36,926 39,754 Debtors... 420,829 485,251 Cash at bank and in hand... 179,230 198,898 Provisions for liabilities and charges... (9,189) (11,607) Creditors: amounts falling due within one year... (407,360) (545,631) Creditors: amounts falling due after more than one year... (982,581) (994,984) Shareholders’ funds (before minority interest)... (595,418) (414,577)
(£ in thousands, on a statutory basis)
Nine months ended September 2013 2014 Cash flow data:
Net cash inflow from operating activities... 86,852 68,873 Taxation... (629) (1) Capital expenditure... (10,135) (15,229) Net cash inflow before acquisitions and servicing of finance…... 76,088 53,643 Acquisitions and disposals... (15,191) (13,369) Returns on investments and servicing of finance... (85,386) (83,002) Financing... 20,133 36,753 Exceptional items... (15,948) (16,228) Refinancing and restructuring cash flows ... (8,742) 11,990 Decrease in net cash in the period... (29,046) (10,213)
Refinancing and restructuring cash flows in the period ended September 30, 2014, deriving from the issue of share capital in Towergate Holdings I Plc on March 28, 2014, and in the period ended September 30, 2013 from the refinancing transaction on May 10, 2013 were a positive £12.0 million and negative £8.7 million respectively. These are analysed in further detail below.
Nine months ended
(£ in thousands) 2013 2014
Issue of share capital... - 12,088 Receipt of Floating Rate Senior Secured Notes... 396,000 -
Repayment of previous debt arrangements... (394,402) - Payment of fees... (10,340) (98)
Total... (8,742) 11,990
(£ in thousands, except where otherwise indicated, on pro forma basis)
Quarter ended September 30
Nine months ended September 30
2013 2014 2013 2014
Other financial data:
EBITDA... 34,475 26,413 111,472 90,938 Adjusted EBITDA... 35,138 28,301 114,103 98,077 Adjusted EBITDA margin... 32.26% 26.90% 34.46% 29.92% Net borrowings(1)... 999,096 1,040,710 999,096 1,040,710 Divisional data: Turnover by division Underwriting... 21,623 22,571 66,000 69,743 Insurance brokers(2)... 50,411 46,823 151,790 148,683 Direct... 17,306 17,552 49,080 52,356 Paymentshield... 16,692 15,214 50,351 44,166 Networks... 3,397 3,079 10,839 10,848 Central support... (516) - 3,040 2,047 Total Turnover 108,913 105,239 331,100 327,843
Adjusted EBITDA by division
Underwriting... 8,556 9,384 28,222 28,928 Insurance brokers(2)... 11,979 9,103 38,717 31,767 Direct... 8,663 7,511 22,403 21,781 Paymentshield... 12,679 11,709 39,568 33,178 Networks... 1,228 774 4,610 4,438 Central support... (7,967) (10,180) (19,417) (22,015)
Total Adjusted EBITDA 35,138 28,301 114,103 98,077
(1) Net borrowings represent total borrowings less available cash and cash equivalents. The quarter and nine months ended September 30, 2013 have been restated.
The following tables provide a reconciliation of EBITDA and Adjusted EBITDA.
(£ in thousands, on pro forma basis)
Quarter ended September 30
Nine months ended September 30
2013 2014 2013 2014
Loss on ordinary activities after tax... (22,180) (90,724) (57,036) (136,809) Add back:
Interest payable and similar charges(A)... 26,378 29,865 78,994 79,588 Group reorganisation costs... 6,867 7,927 15,948 20,803 Tax on loss on ordinary activities... 226 - 3,838 - Depreciation... 4,004 4,428 11,888 12,724 Amortisation of intangibles... 19,180 20,043 57,840 59,758 Impairment of intangible assets... - 54,874 54,874
EBITDA... 34,475 26,413 111,472 90,938 Add back / (deduct from):
(Profit) / loss on disposal of business(B)... - - 836 -
Asset write-downs in connection with business restructuring(C)... - 70 - 120
Long-term incentive plan charges(D)... 130 150 389 450 Business investment costs(E)... 533 405 1,406 1,091 Regulatory costs(F)... - 1,263 - 5,478 Adjusted EBITDA... 35,138 28,301 114,103 98,077
(A) Interest payable and similar charges are comprised of interest payable on bank loans, director’s loans, non-cash amortisation of financing costs capitalised in connection with the Existing Credit Facilities and the Lloyds Facilities and the Notes, finance charges payable in respect of finance leases and hire purchase contracts and certain other charges.
(B) Represents accounting loss recorded as part of the stepped acquisition of Morgan Law Limited of £902k and profit on disposal of a portfolio from Fusion Insurance Services Limited of £66k.
(C) Represents costs incurred in relation to potential acquisitions and disposals of businesses.
(D) Represents provisions charged in connection with potential future settlement costs of our long-term incentive plans. Some directors and senior management are entitled to a one-time cash bonus, based on the value appreciation of the group.
(E) Represents investment costs which are incurred for the purposes of generating future EBITDA and value growth. Business investments costs will include, amongst other things; recruitment and compensation costs paid to market professionals recruited from competitors for the period following their resignation from such competitors and prior to when they are able to solicit clients on our behalf due to non-compete clauses in favour of such competitors and the costs of recruitment and appointment of executive, non-executive and specialist advisers
(F) Represents costs incurred due to work carried out as a result of our regulatory investigations on client money and etv/ucis and in implementing our control framework
Unaudited financial information and other data
for the quarter ended September 30, 2014
(£ in thousands, except where otherwise indicated)
Quarter ended September 30, 2014 for Towergate Holdings I(1) Removal of the results and pro forma adjustments for the disposal of FICL(2) Pro forma quarter ended September 30, 2014
Consolidated profit and loss account
Group turnover 105,237 2(a) 105,239
Administrative expenses (83,488) - (83,488)
Amortisation of intangibles (20,043) - (20,043)
Impairment of intangible assets (54,874) - (54,874)
Group operating profit (53,168) 2 (53,166)
Profit / (loss) on disposal of subsidiaries (1,515) 1,515(b) -
Group reorganisation costs (7,927) - (7,927)
Loss on ordinary activities before interest (62,610) 1,517 (61,093)
Other interest receivable and similar income 234 - 234
Interest payable and similar charges(3) (28,447) - (28,447)
Amortisation of capitalised financing fees(4) (1,418) - (1,418)
Loss on ordinary activities before taxation (92,241) 1,517 (90,724) Tax on loss on ordinary activities(5)
- -(c)
-
Loss on ordinary activities after taxation (92,241) 1,517 (90,724)
Other data
Available cash(6)
42,075 - 42,075
EBITDA 24,896 1,517 26,413
Adjusted EBITDA 28,299 2 28,301
Adjusted EBITDA margin - - 26.90%
Adjusted EBITDA 12 months to September 30, 2014 131,811 34 131,845
Capital expenditure 7,857 - 7,857
Adjusted net senior borrowings(7) - - 672,905
Adjusted net total borrowings(7) - - 1,040,710
Ratio of adjusted net senior secured borrowings to adjusted EBITDA(7) - - 5.10
Ratio of adjusted net total borrowings to adjusted EBITDA(7)
- - 7.89 Division data Turnover by division Underwriting 22,571 - 22,571 Insurance Brokers 46,823 - 46,823 Direct 17,552 - 17,552 Paymentshield 15,214 - 15,214 Networks 3,079 - 3,079 Central support (2) 2 -
Adjusted EBITDA by division
Underwriting 9,384 - 9,384 Insurance Brokers 9,103 - 9,103 Direct 7,511 - 7,511 Paymentshield 11,709 - 11,709 Networks 774 - 774 Central support (10,182) 2 (10,180)
(1) The information in this column has been derived from the unaudited consolidated financial statements of Towergate Holdings I Plc as of and for the quarter ended September 30, 2014.
(2) The pro forma and removal of trading period adjustments for the disposal of FICL give effect to the following adjustments:(a) Represents the trading period July 01, 2014 to September 30, 2014 and is compiled from information in the respective management accounts of FICL. (b) Represents the reversal of the consolidated loss on the disposal of FICL in the Towergate Holdings I group (c) Represents the tax effect of pro forma adjustments (a) and (b).
(3) Interest payable and similar charges are comprised of interest payable on bank loans, director’s loans, the Notes, finance charges payable in respect of finance leases and hire purchase contracts, hedging costs and certain other charges.
(4) Represents the non-cash amortisation of financing costs capitalised in connection with the Revolving Credit Facility and the Notes.
(5) The Towergate Holdings I group expects to incur a corporation tax charge for 2014. Part of this liability will then be offset by the tax benefit of deductions incurred by companies outside the group.
(6) Available Cash excludes restricted cash in an amount of £156.8 million. Restricted cash consists of (i) client money in respect of insurance premiums due to insurance companies and insurance company money in respect of claims payments due to policyholders, (ii) cash deposits kept for the purposes of solvency and capital adequacy requirements imposed by the FCA, and (iii) rent deposits.
(7) For the purposes of calculating adjusted net senior secured borrowings, total group debt excludes unsecured loan notes and has been adjusted for the pro forma available cash of £42.0 million. The ratios of adjusted net senior secured borrowings to adjusted EBITDA and adjusted net total borrowings to adjusted EBITDA are calculated by reference to the pro forma adjusted EBITDA for the 12 months ended 30 September 2014 of £131.8 million.
Unaudited financial information and other data
for the nine months ended September 30, 2014
(£ in thousands, except where otherwise indicated)
Nine months ended September 30, 2014 for Towergate Holdings I(1) Removal of the results and pro forma adjustments for the disposal of FICL(2) Pro forma nine months ended September 30, 2014)
Consolidated profit and loss account
Group turnover 327,818 25(a)
327,843
Administrative expenses (250,254) - (250,254)
Amortisation of intangibles (59,758) - (59,758)
Impairment of intangible assets (54,874) - (54,874)
Group operating profit (37,068) 25 (37,043)
Profit / (loss) on disposal of subsidiaries (1,515) 1,515(b) -
Group reorganisation costs (20,803) - (20,803)
Loss on ordinary activities before interest (59,386) 1,540 (57,846)
Other interest receivable and similar income 625 - 625
Interest payable and similar charges(3) (75,362) - (75,362)
Amortisation of capitalised financing fees(4) (4,226) - (4,226)
Loss on ordinary activities before taxation (138,349) 1,540 (136,809) Tax on loss on ordinary activities(5)
- - -
Loss on ordinary activities after taxation (138,349) 1,540 (136,809)
Other data
Available cash(6)
42,075 - 42,075
EBITDA 89,398 1,540 90,938
Adjusted EBITDA 98,052 25 98,077
Adjusted EBITDA margin - - 29.92%
Adjusted EBITDA 12 months to September 30, 2014 131,811 34 131,845
Capital expenditure 15,229 - 15,229
Adjusted net senior borrowings(7) - - 672,905
Adjusted net total borrowings(7) - - 1,040,710
Ratio of adjusted net senior secured borrowings to adjusted EBITDA(7)
- - 5.10
Ratio of adjusted net total borrowings to adjusted EBITDA(7)
- - 7.89 Division data Turnover by division Underwriting 69,743 - 69,743 Insurance Brokers 148,683 - 148,683 Direct 52,356 - 52,356 Paymentshield 44,166 - 44,166 Networks 10,848 - 10,848 Central support 2,022 25 2,047
Adjusted EBITDA by division
Underwriting 28,928 - 28,928 Insurance Brokers 31,767 - 31,767 Direct 21,781 - 21,781 Paymentshield 33,178 - 33,178 Networks 4,438 - 4,438 Central support (22,040) 25 (22,015)
(1) The information in this column has been derived from the unaudited consolidated financial statements of Towergate Holdings I Plc as of and for the nine months ended September 30, 2014.
(2) The pro forma and removal of trading period adjustments for the disposal of FICL give effect to the following adjustments:(a) Represents the trading period January 01, 2014 to September 30, 2014 and is compiled from information in the respective management accounts of FICL. (b) Represents the reversal of the consolidated loss on the disposal of FICL in the Towergate Holdings I group (c) Represents the tax effect of pro forma adjustments (a) and (b).
(3) Interest payable and similar charges are comprised of interest payable on bank loans, director’s loans, the Notes, finance charges payable in respect of finance leases and hire purchase contracts, hedging costs and certain other charges.
(4) Represents the non-cash amortisation of financing costs capitalised in connection with the Revolving Credit Facility and the Notes.
(5) The Towergate Holdings I group expects to incur a corporation tax charge for 2014. Part of this liability will then be offset by the tax benefit of deductions incurred by companies outside the group.
(6) Available Cash excludes restricted cash in an amount of £156.8 million. Restricted cash consists of (i) client money in respect of insurance premiums due to insurance companies and insurance company money in respect of claims payments due to policyholders, (ii) cash deposits kept for the purposes of solvency and capital adequacy requirements imposed by the FCA, and (iii) rent deposits.
(7) For the purposes of calculating adjusted net senior secured borrowings, total group debt excludes unsecured loan notes and has been adjusted for the pro forma available cash of £42.0 million. The ratios of adjusted net senior secured borrowings to adjusted EBITDA and adjusted net total borrowings to adjusted EBITDA are calculated by reference to the pro forma adjusted EBITDA for the 12 months ended 30 September 2014 of £131.8 million.
Unaudited pro forma financial information and other data
for the quarter ended September 30, 2013
(£ in thousands, except where otherwise indicated)
Quarter ended September 30, 2013 for Towergate Holdings I(1) Removal of the results and pro forma adjustments for the disposal of TUCP and FICL(2) Pro forma adjustments for marketing costs(3) Adjustments for restructuring of businesses between divisions(4) Pro forma quarter ended September 30, 2013
Pro forma consolidated profit and loss account
Group turnover 109,323 (410)(a) - - 108,913
Administrative expenses (78,378) 253(b)
(800) - (78,925)
Amortisation of intangibles (19,413) 233(c) - - (19,180)
Group operating profit 11,532 76 (800) - 10,808
Profit / (loss) on disposal of subsidiaries - - - - -
Group reorganisation costs (6,867) - - - (6,867)
Profit/(loss) on ordinary activities before interest 4,665 76 (800) - 3,941
Write off deal costs - - - - -
Other interest receivable and similar income 483 - - - 483
Interest payable and similar charges(5)
(24,927) - - - (24,927)
Amortisation of capitalised financing fees(6)
(1,451) - - - (1,451)
Profit/(loss) on ordinary activities before taxation (21,230) 76 (800) - (21,954)
Tax on profit/(loss) on ordinary activities(7) (395) (17) 186 - (226)
Profit/(loss) on ordinary activities after taxation (21,625) 59 (614) - (22,180) Other pro forma data
Available cash(8)(*) 16,468 (3,982) - - 12,486
EBITDA 35,433 (158) (800) - 34,475
Adjusted EBITDA 36,096 (158) (800) - 35,138
Adjusted EBITDA margin - - - - 32,26%
Adjusted EBITDA 12 months to September 30, 2013 158,942 (2,499) (3,200) - 153,243
Capital expenditure 3,571 12 - - 3,583
Adjusted net senior borrowings(9)(*)
- - - - 637,495
Adjusted net total borrowings(9)(*) - - - - 999,096
Ratio of adjusted net senior secured borrowings to adjusted EBITDA(9)(*)
- - - - 4.16
Ratio of adjusted net total borrowings to adjusted EBITDA(9)(*)
- - - - 6.52
Pro forma division data
Turnover by division
Underwriting 22,469 (416) - (431) 21,622
Insurance Brokers 48,923(a)
- - 1,489 50,412
Direct 18,416(a) - - (1,110) 17,306
Paymentshield 17,135 - - (443) 16,692
Networks 2,902 - - 495 3,397
Central support (522) 6 - - (516)
Adjusted EBITDA by division
Underwriting 8,740 (164) - (20) 8,556
Insurance Brokers 11,975(a)
- - 4 11,979
Direct 9,372(a) - (800) 91 8,663
Paymentshield 12,838 - - (159) 12,678
Networks 1,144 - - 84 1,228
Central support (7,973) 6 - - (7,967)
(1) The information in this column has been derived from the unaudited consolidated financial statements of Towergate Holdings I Plc as of and for the quarter ended September 30, 2013. (a) The segmental disclosure has been restated since the report issued for the quarter ended September 30, 2013 to show how our retail business would have been reported under the new segments – Insurance Brokers and Direct.
(2) The pro forma and removal of trading period adjustments for the disposal of TUCP and FICL give effect to the following adjustments:(a) and (b) Represents the trading period June 01, 2013 to September 30, 2013 and is compiled from information in the respective management accounts of TUCP and FICL. (c) Represents the reversal of 3 months of goodwill that has been amortised within the Towergate Holdings I group in 2013, based on an imputed goodwill of £18.7 million for TUCP and £nil for FICL (d) Represents the tax effect of pro forma adjustments (a), (b) and (c). (3) The pro forma adjustment is to reflect the accelerated amortisation of marketing costs in the years to which they relate
(4) Reflects the internal restructuring of certain businesses between the relevant divisions.
(5) Interest payable and similar charges are comprised of interest payable on bank loans, director’s loans, the Notes, finance charges payable in respect of finance leases and hire purchase contracts, hedging costs and certain other charges.
(6) Represents the non-cash amortisation of financing costs capitalised in connection with the Existing Credit Facilities, the Lloyds Facilities and the Notes.
(7) The Towergate Holdings I group expects to incur a corporation tax charge for 2013. Part of this liability will then be offset by the tax benefit of deductions incurred by companies outside the group.
(8) Available cash excludes restricted cash in an amount of £162.8 million. Restricted cash consists of (i) client money in respect of insurance premiums due to insurance companies and insurance company money in respect of claims payments due to policyholders, (ii) cash deposits kept for the purposes of solvency and capital adequacy requirements imposed by the FCA and (iii) rent deposits.
(9) For the purposes of calculating adjusted net senior secured borrowings, total group debt excludes unsecured loan notes and has been adjusted for the pro forma available cash of £12.5 million. The ratios of adjusted net senior secured borrowings to adjusted EBITDA and adjusted net total borrowings to adjusted EBITDA are calculated by reference to the pro forma adjusted EBITDA for the 12 months ended 30 September 2013 of £153.2 million.
Unaudited pro forma financial information and other data
for the nine months ended September 30, 2013
(£ in thousands, except where otherwise indicated)
Nine months ended September 30, 2013 for Towergate Holdings I(1) Removal of the results and pro forma adjustments for the disposal of TUCP and FICL(2) Pro forma adjustments for marketing costs(3) Pro forma adjustments for refinancing(4) Pro forma nine months ended September 30, 2013
Pro forma consolidated profit and loss account
Group turnover 333,388 (2,288)(a) - - 331,100
Administrative expenses (230,336) 751(b)
(2,500) - (232,085)
Amortisation of intangibles (58,540) 700(c) - - (57,840)
Group operating profit 44,512 (837) (2,500) - 41,175
Profit / (loss) on disposal of subsidiaries (836) - - - (836)
Group reorganisation costs (15,948) - - - (15,948)
Profit/(loss) on ordinary activities before interest 27,728 (837) (2,500) 24,391
Write off deal costs (14,115) - - 14,115(a) -
Other interest receivable and similar income 1,405 - - - 1,405
Interest payable and similar charges(5)
(74,386) - - (251)(b) (74,637)
Amortisation of capitalised financing fees(6)
(4,627) - - 270(c)
(4,357)
Profit/(loss) on ordinary activities before taxation (63,995) (837) (2,500) 14,134 (53,198)
Tax on profit/(loss) on ordinary activities(7) (1,328) 195(d)
581 (3,286)(d) (3,838)
Profit/(loss) on ordinary activities after taxation (65,323) (642) (1,919) 10,848 (57,036) Other pro forma data
Available cash(8)(*) 16,467 (3,982) - - 12,485
EBITDA 115,510 (1,538) (2,500) - 111,472
Adjusted EBITDA 118,141 (1,538) (2,500) - 114,103
Adjusted EBITDA margin - - - - 34.46%
Adjusted EBITDA 12 months to September 30, 2013 158,942 (2,499) (3,200) - 153,243
Capital expenditure 10,135 12 - - 10,147
Adjusted net senior borrowings(9)(*)
- - - - 637,495
Adjusted net total borrowings(9)(*) - - - - 999,096
Ratio of adjusted net senior secured borrowings to adjusted EBITDA(9)(*)
- - - - 4.16
Ratio of adjusted net total borrowings to adjusted EBITDA(9)(*)
- - - - 6.52
Pro forma division data
Turnover by division
Underwriting 69,654 (2,327) - (1,327)(e)
66,000
Insurance Brokers 147,055(a)
- - 4,735(e)
151,790
Direct 52,714(a) - - (3,634)(e) 49,080
Paymentshield 51,632 - - (1,281)(e) 50,351
Networks 9,332 - - 1,507(e)
10,839
Central support 3,001 39 - - 3,040
Adjusted EBITDA by division
Underwriting 29,983 (1,577) - (184)(e)
28,222
Insurance Brokers 38,369(a)
- - 348(e)
38,717
Direct 24,990(a) - (2,500) (87)(e) 22,403
Paymentshield 40,009 - - (441)(e) 39,568
Networks 4,246 - - 364(e)
4,610
Central support (19,456) 39 - - (19,417)
(1) The information in this column has been derived from the unaudited consolidated financial statements of Towergate Holdings I Plc as of and for the nine months ended September 30, 2013. (a) The segmental disclosure has been restated since the report issued for the nine months ended September 30, 2013 to show how our retail business would have been reported under the new segments – Insurance Brokers and Direct.
(2) The pro forma and removal of trading period adjustments for the disposal of TUCP and FICL give effect to the following adjustments:(a) and (b) Represents the trading period January 01, 2013 to September 30, 2013 and is compiled from information in the respective management accounts of TUCP and FICL. (c) Represents the reversal of 9 months of goodwill that has been amortised within the Towergate Holdings I group in 2013, based on an imputed goodwill of £18.7 million for TUCP and £nil for FICL (d) Represents the tax effect of pro forma adjustments (a), (b) and (c).
(3) The pro forma adjustment is to reflect the accelerated amortisation of marketing costs in the years to which they relate
(4) The pro forma adjustments for the transaction of May 10, 2013 give effect to the following adjustments: (a) Represents the write off of costs capitalised in respect of the previous financing arrangements that were repaid in full on May 10, 2013 (b) Represents (i) Interest cost for the Floating Rate Senior Secured Notes, £85 million New Revolving Credit Facility, £14.6 million Senior Notes & £4.0 million Senior Secured Notes for the period January 1, 2013 to May 10, 2013 in an amount of £9.8 million, less (ii) the interest already shown in the Towergate Holdings I group in 2013 in respect of the previous debt facilities that were repaid in full or renegotiated on May 10, 2013 in an amount of £9.6 million (c) Represents (i) Amortisation charge for the fees incurred in connection with the Transaction for the period January 1, 2013 to May 10, 2013 in an amount of £1.1 million, based on imputed fees of £13.5 million, less (ii) the amortisation charge already shown in the Towergate Holdings I group in 2013 in respect of the fees capitalised on the previous debt facilities that were repaid in full on May 10, 2013 in an amount of £1.4 million; (d) Represents the tax effect of pro forma adjustments (a), (b) and (c). (e) reflects the internal restructuring of certain businesses between the relevant divisions.
(5) Interest payable and similar charges are comprised of interest payable on bank loans, director’s loans, the Notes, finance charges payable in respect of finance leases and hire purchase contracts, hedging costs and certain other charges.
(6) Represents the non-cash amortisation of financing costs capitalised in connection with the Existing Credit Facilities, the Lloyds Facilities and the Notes.
Management’s discussion and analysis of financial condition and
results of operations
Overview
We are the leading independently owned insurance intermediary company distributing general insurance products in the United Kingdom, based on gross written premium. In 2013, our operations managed approximately £3.1 billion of pro forma gross written premium, which was in line with 2012. We distribute insurance products through our own brokers and third-party brokers, including mortgage brokers and other mortgage intermediaries. We also provide services to members of our broker network. We focus on SMEs in the commercial insurance market and on specialist personal insurance markets. Due to the breadth of our operations, we perform many of the roles in the insurance supply chain other than the provision of capital in respect of insurance claims. We do not incur any underwriting risk at any stage of the process and therefore have limited regulatory capital requirements.
Since 1997, we have acquired and successfully integrated over 295 underwriting agency and broker businesses. On October 31, 2013, Towergate announced the sale of TUCP to Global Risk Partners for a total consideration of £9.25 million. On August 29, 2014, the Towergate Group sold two companies, Folgate Insurance Company Limited (FICL) and FICL Holdco Limited to Anglo London Limited for consideration of £1.9 million. TUCP is a provider of insurance for large sized European and UK commercial property owners and Folgate Insurance Company Limited is an insurance company in run off, as such both businesses operated outside Towergate’s main area of focus.
In the twelve months ended December 31, 2013, on a pro forma basis adjusted for the TUCP and FICL transactions, we had turnover of £442.2 million and Adjusted EBITDA of £147.9 million.
Our principal businesses are as follows:
Insurance Brokers – Our insurance brokers division distributes specialised personal lines products, and more general products aimed at SMEs through around 90 broking offices located across the United Kingdom. Our brokers place the insurance policies of our customers through our own underwriting agencies or directly with insurance companies depending on which insurance product is best suited to the needs of the customer.
As part of our Insurance Brokers division, we also offer regulated and unregulated financial advisory services to corporate and private clients across the United Kingdom under the brand name Towergate Financial.
Direct – Our Direct businesses cover specialist customer segments ranging from military personnel and high net worth individuals to caravan owners and SMEs. We offer services to many niche markets and volume SME businesses, including the Federation of Small Businesses.
Underwriting – Our Underwriting division provides insurance products to around 3,000 insurance brokers who act on behalf of insured customers. As an underwriting agency, we price insurance coverage, issue insurance policies and, in most cases, handle insurance claims on behalf of insurance companies. Insurance companies are ultimately responsible for insurance claim costs and thus carry the associated capital risk. We offer over 400 insurance products covering a wide variety of risks. As in our Insurance Brokers and Direct divisions, these insurance products consist primarily of specialised products aimed typically at non-standard personal lines customers and more general products aimed at SMEs. We operate via 16 underwriting businesses.
Paymentshield – Paymentshield provides related insurance products, such as household-related insurance and mortgage payment protection insurance, via third-party mortgage brokers and other mortgage intermediaries, such as estate agents, independent financial advisers and loan brokers. Paymentshield is the leading distributor for household-related insurance products to the mortgage intermediary market in the United Kingdom. Following the sale of its products, Paymentshield assumes the relationship directly with the end customer. Paymentshield is also growing its volume of new business generated through sources other than mortgage intermediaries, including selling through third-party call centres and responding to inbound inquiries. As with our broking business, all underwriting risk is carried by our insurance partners.
Networks – Our Network division provides independent brokers with access to insurance products and a variety of business support services. The insurance products available through the Network are often only available to members and include all the products available from our own underwriting agencies. Members typically also receive enhanced commission rates negotiated by the Network. The business support services provided to members assist them in managing their business and range from marketing to compliance services and advice. Our Network division is the largest full service general insurance network for brokers in the United Kingdom by number of members.
Pro forma three and nine months ended September 30, 2014 compared with the pro forma three and nine months ended September 30, 2013
Group turnover
(£ in thousands)
Quarter ended September
30, 2013 2014 Change % Change Underwriting... 21,622 22,571 948 4.38 Insurance Brokers(1)... 50,412 46,823 (3,588) (7.12) Direct... 17,306 17,552 246 1.42 Paymentshield………... 16,692 15,214 (1,478) (8.85) Networks... 3,397 3,079 (318) (9.36) Central support(2)... (516) - 516 100.00 Total... 108,913 105,239 (3,674) (3.37) (£ in thousands)
Nine months ended September 30, 2013 2014 Change % Change Underwriting... 66,000 69,743 3,743 5.67 Insurance Brokers(1)... 151,790 148,683 (3,107) (2.05) Direct... 49,080 52,356 3,276 6.67 Paymentshield………... 50,351 44,166 (6,185) (12.28) Networks... 10,839 10,848 9 0.08 Central support(2)... 3,040 2,047 (993) (32.66) Total... 331,100 327,843 (3,257) (0.98)
(1) Includes Towergate Financial.
(2) Includes business support function costs and certain profit commissions earned.
Turnover for the nine months ended September 30, 2014 is broadly in line with the prior year. Positive variances in Direct, Underwriting and Networks have been offset by a negative variance in Insurance Brokers,
Paymentshield and lower profit share in Central Support.
Insurance Brokers turnover reduced by 2.0% (£3.1 m) having been impacted by the Broking change program. Direct division turnover has increased by 6.7% (£3.3m) driven by the Footman James acquisition.
Underwriting turnover increased 5.7% (£3.7m) driven by the Arista acquisition.
Paymentshield turnover reduced by 12.3% (£6.2m). The prior year included the final instalment of historic advanced commission.
Networks turnover is in line with prior year. Profit and loss account data
(£ in thousands, on pro forma basis)
Quarter ended September 30
Nine months ended September 30
2013 2014 2013 2014
Group turnover... 108,913 105,239 331,100 327,843 Administrative expenses... (78,925) (83,488) (232,085) (250,254) Profit on ordinary activities before interest and amortisation... 29,988 21,751 99,015 77,589 Amortisation of intangibles... (19,180) (20,043) (57,840) (59,758) Impairment of intangible assets... - (54,874) - (54,874) Profit / (loss) on sale of business... - - (836) - Group reorganisation costs... (6,867) (7,927) (15,948) (20,803) Profit / (loss) on ordinary activities before interest... 3,941 (61,093) 24,391 (57,846) Other interest receivable and similar income... 483 234 1,405 625 Interest payable and similar charges... (24,927) (28,447) (74,637) (75,362)
Administrative expenses
Administrative expenses in the nine months to September 30, 2014 have increased by £18.2 million, or 7.8%, principally due to acquisitions.
Amortisation of intangibles
Amortisation of intangibles in the nine months to September 30, 2014 increased by £1.9 million, or 3.3%. This increase derives mainly from the amortisation under UK GAAP of goodwill attributed to acquisitions of companies during the twelve months ended September 30, 2014.
Impairment of intangible assets
Impairment of intangible assets is in relation to the Network division and is discussed further within recent developments.
Group reorganisation costs
Group reorganisation costs were £20.8 million in the nine months to September 2014 compared to £15.9 million in 2013. The costs represent the ongoing reorganisation to improve the operational effectiveness and position the Group for the future. The costs associated with implementing these changes have been shown separately as exceptional items in accordance with UK GAAP.
Other interest receivable and similar income
Other interest receivable and similar income in the nine months to September 30, 2014 decreased by £0.8 million.
Interest payable and similar charges
Interest payable and similar charges in the nine months to September 30, 2014 has increased by £0.7 million. Tax on loss on ordinary activities
Tax on loss on ordinary activities in the nine months to September 30, 2014 was £nil compared with £3.8 million in 2013. This is the result of higher losses on ordinary activities before tax as discussed above.
Adjusted EBITDA
Adjusted EBITDA in the nine months to September 30, 2014 was £98.1 million compared with £114.1 million for the same period in 2013, a decrease of £16.0 million, or 14.0%, this being a reflection of the trading results for the periods as discussed under Group Turnover and increased costs as reviewed above.
Balance Sheet
The table below shows the Towergate Holdings I Group balance sheet as at September 30, 2014 and September 30, 2013. The balance sheet is presented on a statutory basis. TUCP was sold on October 31, 2013 and FICL was sold on August 29, 2014. As a result of this the balances presented include TUCP and FICL as at September 30, 2013 but not as at September 30, 2014.
(£ in thousands, on statutory basis)
September 30, 2013 2014 Balance sheet data:
Intangible assets... 1,357,876 1,243,259 Tangible assets... 36,926 39,754 Debtors... 420,829 485,251 Cash at bank and in hand... 179,230 198,898 Provisions for liabilities and charges... (9,189) (11,607) Creditors: amounts falling due within one year... (407,360) (545,631) Creditors: amounts falling due after more than one year... (982,581) (994,984) Shareholders’ funds (before minority interest)... (595,418) (414,577)
Intangible assets
Intangible assets have decreased by £114.6 million from September 30, 2013 to September 30, 2014. The decrease is due to the impairment of the carrying value of goodwill relating to Networks by £54.9 million, amortisation charges and the net effect of the goodwill removed on the disposal of TUCP in Q4 of 2013, partly offset by acquisitions in the period. The Group was not carrying a goodwill balance in relation to Folgate Insurance Company Limited prior to its sale.
Tangible assets
Tangible assets have increased by £2.8 million as capital expenditure and assets brought in with acquisitions in the period are in excess of the depreciation charge and net effect of any assets disposed of.
Debtors
The debtors balance of the Towergate Holdings I group has increased by £64.4 million from September 30, 2013 to September 30, 2014. This is due to an increase in insurance debtors of £42.3 million, an increase in the intercompany balance due from companies outside the group of £19.2 million and deferred consideration receivable following the sale of TCPU of £3.2 million. The increase in insurance debtors is partly due to acquisitions and partly due to an increase in aged debtors due to the transition to a central function, and will, therefore, reverse. The increase in intercompany relates to the cash injection of £12.1 million into the Towergate Holdings I group by its holding company via a share issue. There is a corresponding increase in creditors due to companies outside the group in relation to this transaction.
Cash at bank and in hand
Cash at bank and in hand has increased by £19.7 million from September 30, 2013 to September 30, 2014. This increase is due to the full drawdown of the RCF of £85 million and the Directors assess this gives excess cash in the business of £16 million as at 30 September, 2014. Cash movement is considered in further detail in the cash flow section of this report.
Provision for liabilities and charges
The £2.4 million increase in the provisions balance from September 30, 2013 to September 30, 2014 is as a result of the creation of an onerous lease provision in December 2013 for £1.6 million plus an increase in the Group’s provision for errors and omissions offset by reductions in the share based payment and FRS 5 provisions.
Creditors
Creditors balances for the group have increased by £150.7 million from September 30, 2013 to September 30, 2014. The increase principally relates to the additional debt incurred as a result of draw downs from the RCF facility of £65.0 million, an increase in insurance creditors of £38.4 million which is mainly due to acquisitions, an increase in amounts due to companies outside the group of £21.1 million mainly in relation to the share issue mentioned under debtors above and an increase in the PIK loan balance due to the roll up of interest of £6.2 million.
Cash flow
The cash flow analysis below is presented on a statutory basis therefore includes TUCP for the period January 1, 2013 to September 30, 2013 and excludes it for the period January 1, 2014 to September 30, 2014. Folgate Insurance Company Limited is included for the period January 1, 2013 to September 30, 2013 and for the period January 1, 2014 to August 29, 2014 and is excluded for the period August 30, 2014 to September 30, 2014.
(£ in thousands, on a statutory basis)
Nine months ended September 30 2013 2014 Cash flow data:
Net cash inflow from operating activities... 86,852 68,873 Taxation... (629) (1) Capital expenditure... (10,135) (15,229) Net cash inflow before acquisitions and servicing of finance... 76,088 53,643 Acquisitions and disposals... (15,191) (13,369) Returns on investments and servicing of finance... (85,386) (83,002) Financing... 20,133 36,753 Exceptional Items... (15,948) (16,228) Refinancing and restructuring cash flows... (8,742) 11,990 Decrease in net cash in the period... (29,046) (10,213)
Net cash inflow from operating activities
Net cash inflow from operating activities has decreased in the period to September 30, 2014 when compared to the prior year. This is mainly due to the £16 million decrease in Adjusted EBITDA in the period to September 30, 2014 when compared to the period to September 30, 2013.
Capital expenditure
Capital expenditures, excluding acquisitions, for the period ended September 30, 2014 were £15.2 million. This is £5.0 million higher than the same period in 2013 and is mainly due to increased expenditure on information technology software and leasehold improvements in our new office in Manchester.
Acquisitions and disposals
The cash outflow relates to payments for acquisitions of companies and portfolios. Returns on investments and servicing of finance
The decrease in returns on investments and servicing of finance in 2014 compared with 2013 is primarily due to the timing intervals of the scheduled interest payments before and after the May 2013 refinancing.
Financing
The £36.8 million cash inflow for the nine months to September 2014 represents drawn downs from the Revolving Credit Facility of £42.0 million partially offset by payments of deferred consideration of £5.2 million. The £20.1 million cash inflow for the nine months to September 2013 represents drawn downs from the Acquisition Facility under the Senior Facilities Agreement of £10.7 million and drawings on the revolving credit facility of £20 million partially offset by capital repayments on Facility A of £5.0 million; on the Incremental facility of £2.2 million; repayment of deferred consideration of £3.3 million; and payment of deal fees related to the February 11, 2011 transaction of £0.1 million.
Exceptional items
The cash outflows for the nine months to September 2013 and 2014 represent costs in respect of the group reorganisation costs. These items have been shown separately in accordance with UK GAAP.
Refinancing and restructuring cash flows
The £12.0 million cash inflow for the period to September 30, 2014, represents the share capital issue on March 28, 2014.
Liquidity and capital resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditure, debt service obligations, other commitments, contractual obligations and acquisitions. Our primary sources of liquidity are provided by our cash from operating activities and our financing. Our liquidity requirements arise primarily to meet our debt service obligations, to fund acquisitions and to fund capital expenditures.
Going Concern
The financial position of the Group, its profit and loss, cash flow and balance sheet position as set out in this report have been prepared on a going concern basis.
In reaching their view on preparation of the results of the Group on a going concern basis, the Directors have considered the anticipated future cash flows of the Group. Cash flow forecasts have been prepared for the period to 31 December 2015, and subjected to stress and scenario testing on key assumptions.
In reviewing the anticipated future cash flows the Directors have considered and initiated action around the following key uncertainties:
Operational cash flow: The Group had a net cash outflow before financing of £59m for the 9 month
period ended 30 September 2014 (compared to £40m for the 9 month period ended 30 September 2013) and held £42m of unrestricted cash as at 30 September 2014 (compared to £12m as at 30 September 2013). This net cash outflow reflects the Group’s trading performance, investment in change projects, and costs incurred in relation to regulatory investigations. Trading income in Q3 2014 in particular has been impacted by the significant level of organisational change across the business, specifically in our Broking Division. As we look forward across 2015 we expect the level of change investment and organisational change to decrease as the year proceeds, and for operational costs to decrease in line with headcount reductions. We also expect legacy hedging costs to cease in January 2015. In addition, a number of near term disposals of non-core businesses and other management actions aimed at improving short term liquidity are being actively progressed by the Group. However, the timing and quantum of these actions are uncertain as some involve negotiation with third parties and, if such actions are not successfully completed within the necessary timeframe, there is a risk that the Group may have a liquidity shortfall in Q1 2015. If as a result of such shortfall we fail to meet our payment obligations under our debt facilities, bondholders and/or lenders may have the ability to demand early repayment of their debt.
Financing: The Revolving Credit Facility (RCF) of £85m which has been fully drawn (as compared to£43m as at 30 September 2013) is shown in creditors less than one year. The Group is currently in compliance with its financial covenant, however, based on the latest forecasts and the fact that the covenant level contractually tightens through to maturity of the facility, the Group may be unable to satisfy its financial covenant going forward. The Group is entering discussions with lenders with a view to renegotiating its financial covenant, but there is a risk that an agreement on renegotiated terms may not be reached and that the Group’s lenders, acting in their majority, may seek repayment of the debt.
Contingent Liability: As discussed below, there is uncertainty around the outcome, quantum, timing and
recoveries of redress payments relating to advice given by the Towergate Financial business in respect of Enhanced Transfer Values and Unregulated Collective Investment Schemes. Whilst a number of scenarios for the quantum, timing and recoveries of redress costs have been considered within the cash flow forecast reviewed by the Directors as part of their consideration of the operational cash flow, there remains significant uncertainty as to the ultimate outcome. The Group continues to investigate these issues and is in ongoing discussions with the Financial Conduct Authority.
In light of the uncertainty around operational cash flow and liquidity in Q1 2015 for which some of management’s actions require the agreement of third parties, the successful renegotiation of the Group’s financial covenant and the quantum, timing and recoveries of customer redress payments, it has to be recognised that there is material uncertainty which may cast significant doubt as to the Group’s ability to continue as a going concern and, if the assumptions underpinning the Group’s projections are not realised, the Group may therefore be unable to realise its assets and discharge its liabilities in the normal course of business.
Nevertheless, the Group’s forecasts and projections, taking into account possible changes in trading performance and operational costs, show that if the Group is able to implement the disposals of non-core businesses and other identified management actions it will have adequate financial resources to enable it to continue in operational existence for the foreseeable future.
Contractual Obligations
The following table summarises the material contractual obligations as of September 30, 2014:
Contractual obligations (£ in millions) Total Less than 1 year 1-5 years More than 5 years
Senior Secured Notes………... 233.8 - 233.8 -
Revolving Credit Facility... 85.0 85.0 - -
Senior Secured Floating Rate Notes ……... 396.0 - 396.0 -
Senior Notes... 304.0 - 304.0 - PIK Loan Notes... 60.1 - 60.1 - Other obligations (1)... 28.9 13.4 15.5 - Operating leases... 12.7 0.5 5.4 6.8
Total contractual obligations... 1,120.5 98.9 1,014.8 6.8
(1) Represents deferred consideration in an amount of £28.7 million and obligations under finance leases and hire purchase contracts in an amount of £0.2 million.
Operating leases
Contractual obligations for operating leases reflect annual commitments under non-cancellable operating leases.
Contingent obligations and liabilities
In the ordinary course of business, we receive claims in respect of errors and omissions. We maintain professional indemnity insurance for errors and omissions claims. The terms of this insurance vary by policy year, and self-insured risks have increased significantly over recent years. We have made a provision for claims in respect of outstanding errors and omissions claims.
The Group operates a cash-settled long term incentive plan for certain employees. Payments are made under the scheme on a ‘change in control event’ basis and the amounts paid are calculated using performance related measures. The maximum amount payable under the plan as at 31 December 2013 is £25.4 million (2012: £28.8 million).
Past Business Reviews
Enhanced Transfer Values
Towergate is continuing discussions with the Financial Conduct Authority (FCA) in connection with past advice provided by the Towergate Financial business on Enhanced Transfers Values (ETV). An independent file review of a sample of ETV cases was undertaken during Q3. This review has indicated that we currently hold insufficient evidence to support the suitability of some of the advice given and that some of the advice provided may not have been suitable. The independent file review will be extended to all, 2,067 cases and customer contact will begin during Q1 2015, with a view to obtaining more customer specific information which will help to determine whether such advice was suitable and the level of any redress which may be due. This process will be ongoing during 2015.
Unregulated Collective Investment Scheme
In consultation with the FCA we have commenced an independent review of the customers whom the Towergate Financial business previously advised to purchase Unregulated Collective Investment Schemes (UCIS). To date we have identified the relevant customer population, which is in the order of 250 cases,and agreed the review methodology with the FCA. The results of this review are expected in Q1 2015.
The method for providing redress for customers in respect of the foregoing ETV and UCIS issues has not yet been agreed with the FCA and customer contact has not commenced. This, when combined with the fact that we remain at a relatively early stage of the file reviews, means that there is considerable uncertainty relating to the outcome of these reviews, both in terms of customer numbers and the amount of any redress.
In addition, whilst Towergate will be seeking to recover from relevant third parties and under its insurance arrangements to the extent possible, the level of recoverability from such parties remains uncertain.
In light of the foregoing uncertainties it is not yet possible to make a reliable estimate of the quantum of our liability, nor to put a meaningful range on the potential outcomes. As a result, no provision for ETV or UCIS redress obligations has been recognised although the ultimate outcome could be material.
Off-balance sheet arrangements
Other than the two derivative swap contracts discussed below, as of September 30, 2014, we had no material off-balance sheet arrangements.
Quantitative and qualitative disclosures about market risk
Market risk is the potential loss arising from adverse changes in market rates and comprises risks relating to foreign exchange rates, interest rates and market prices. We are not exposed to market price risk as we do not own assets whose value is determined by market prices and we are exposed to very limited foreign exchange risk.
We are exposed to interest rate risk in relation primarily to our debt services obligations. As of September 30, 2014, we had £481.0 million of debt subject to variable interest rates. Assuming the amount of debt subject to variable interest rates remains the same, an increase of 0.5% in the interest rate payable on our debt would increase our estimated debt service obligations by £2.4 million. This position is partially hedged through our cash position of £199 million which is held in our current account earning variable interest.
To hedge against interest rate risk, we entered into two derivative swap contracts of £200 million each in connection with our Floating Rate. We continue to be a party to these two derivative swap contracts, which terminate on December 31, 2014. As a result, we will continue to incur hedging costs in respect of these contracts. A 0.5% fall in interest rates would cause a £2.0 million increase in these hedging costs.
Definitions
Except as otherwise specified, as used in this report:
