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Fitch Rates KIRS Group 'B-'; Outlook Positive
June 23, 2017 / 10:54 AM / 6 months ago

Fitch Rates KIRS Group 'B-'; Outlook Positive

(The following statement was released by the rating agency) LONDON, June 23 (Fitch) Fitch Ratings has assigned KIRS Midco 3 plc (KIRS Group) a final 'B-' Long-Term Issuer Default Rating (IDR) with a Positive Outlook. KIRS Group, the UK's leading diversified independent insurance intermediary, has been formed by combining the businesses of Towergate (KIRS Finco plc), with Direct Group, Price Forbes, Chase Templeton and Autonet. Simultaneously, we have affirmed KIRS Finco plc's IDR at 'B-' with Stable Outlook and withdrawn the rating as its debt has been repaid. The rating is constrained by a mature UK insurance market, negative 2017 free cash flow (FCF) and execution risk related to the expected full delivery of the Towergate transformation plan. The rating is supported by the enhanced market position and product diversity of the combined group, improved liquidity and strong shareholder support. A full list of rating actions is available below. KEY RATING DRIVERS Mature UK Market May Moderate Growth: Fitch believes the management team has demonstrated the knowledge and skillset to execute the Towergate transformation plan. However, risks remain in delivering this plan in a highly competitive insurance and brokerage market. The UK non-life insurance broker market is likely to experience limited organic growth over the next four years. In addition, KIRS Group may not be able to continue to attract or retain the skilled employees required to realise these plans or the employees may not deliver as expected. However, this is offset by significantly reduced employee turnover and new revenue-focused hires. There is also potential for disruption from digital technology and disintermediation, which is partly offset through the acquisition of Autonet and KIRS Group's multiple distribution channels. Acquisition Adds Scale and Diversity: The proposed transaction will enhance the scale and diversity of the legacy Towergate business and reinforce its position as the leading diversified independent insurance intermediary in the UK. This will allow KIRS Group to leverage multiple distribution channels to access each of its customer segments with a broad product portfolio. In addition, with a product portfolio targeting segments such as SME, automotive, and health insurance, there is the potential to reduce earnings volatility and through a more integrated approach, to capture a greater proportion of potential revenue. Leverage and FCF Show Positive Trend: The transaction will materially deleverage the group from the historical Towergate capital structure. In particular, funds from operations (FFO) adjusted gross leverage is likely to decline to 7.6x for KIRS Group in 2017 from over 9.0x for Towergate in 2016. Operational improvements and the delivery of the transformation plan will lead to deleveraging, sales growth and FCF improvement. However, KIRS Group's FCF is expected to remain negative in 2017, before trending towards positive territory by 2018. Liquidity risk from negative FCF is mitigated by on balance sheet cash and the addition of a GBP90 million super senior revolving credit facility (RCF). Transformation Programme Has Stabilised Towergate: KIRS Group's Towergate subsidiary has been going through restructuring for the past two years and it has utilised a transformation plan to deliver operational and financial improvements. Towergate has made significant progress on the transformation plan, exceptional items remain and the full annualised benefits will not be realised until 2018 or later. However, it is our view that substantially all of the expense components of the plan have been completed and that management can dedicate increasing resources to developing the strategy around KIRS Group. Support from Shareholders and Regulators Key: Shareholders have invested approximately GBP680 million in KIRS Group and have demonstrated their support both through transactions to provide liquidity to Towergate during the transformation plan and by financing the acquisitions to form KIRS Group. Continued shareholder support is a positive factor for the group. In addition, given that Towergate is regulated by the FCA, it is credit-positive that the FCA has been involved from the outset of the process and remains supportive of the proposed new group. This is an essential component of delivering the proposed transaction. DERIVATION SUMMARY KIRS Group has a significantly smaller scale than its insurance broker peers rated by Fitch and has a less diverse product line. Its expertise in niche, high margin product lines and its leading position among UK insurance brokers underpin a sustainable business model, but its higher financial risk and underperforming business lines constrain the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Sales grow at 2% in 2017 trending towards 6%-7% in 2019-2020; - EBITDA margins grow from 22.4% in 2017 to approximately 29% in 2020; - Capex includes maintenance of 2% per year and growth capex of GBP60 million in total; - Exceptional items include regulatory fees and expenses as well as costs related to the transformation plan. KEY ASSUMPTIONS FOR BESPOKE RECOVERY ANALYSIS - The post-restructuring EBITDA is 10% below Fitch's 2017 forecast EBITDA. This reflects a hypothetical contraction which would provoke a default as well as Fitch's expectation of corrective actions. - 5.5x distressed multiple reflects KIRS Group's strong market position and diversified business profile. - 10% of going concern enterprise value is deducted for administrative claims. - RCF is assumed to be fully drawn upon default. The RCF is super senior to the senior secured notes. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -FFO gross adjusted leverage below 6.5x. -FFO fixed charge coverage above 2.5x. -EBITDA margins sustainably above 25% and trending towards 30%. -Successful integration of KIRS Group. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FFO gross adjusted leverage above 8x; -Persistently negative FCF with FFO fixed charge coverage below 1.5x; -Failure of the transformation plan to deliver expected savings with EBITDA margins below 20%; -Total liquidity below GBP20 million; -Evidence that shareholders no longer support the business. LIQUIDITY RCF Provides Sustainable Liquidity: The transaction will result in GBP42 million on-balance sheet cash. In addition, KIRS Group will have a GBP90 million RCF and no near-term maturities. We expect this to be sufficient to cover negative FCF in 2017 related to the delivery of the transformation plan and other business investments. Fitch expects positive FCF from 2018 to 2020. FULL LIST OF RATING ACTIONS KIRS Midco 3 plc -- Long-Term IDR assigned at 'B-'; Outlook Positive -- Super senior RCF assigned 'BB-'/'RR1' -- Senior secured notes assigned 'B'/'RR3' KIRS Finco plc -- Long-Term IDR affirmed at 'B-'; Outlook Stable and withdrawn -- Super senior notes affirmed at 'BB-'/'RR1' and withdrawn -- Senior secured notes affirmed at 'B-'/'RR4' and withdrawn Contact: Supervisory Analyst Brendan Condon Director +44 20 3530 1599 Fitch Ratings Limited 30 North Colonnade London E14 5GN Principal Analyst Athanasios Smprinis Analyst +44 20 3530 1643 Secondary Analyst Graham Coutts (Insurance) Director +44 20 3530 1654 Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email:; Adrian Simpson, London, Tel: 203 530, Email: Summary of Financial Statement Adjustments - Operating leases were capitalised with a multiple of 8x. Funds required to be held by the regulator was treated as restricted cash. In addition to the source(s) of information identified in the master criteria, this action was additionally informed by information from both the rating advisor and the management team including pro forma financials for the combined group. Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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