Tower Group International this week announced the sale of its stake in Canopius Group Limited for $69.7 million to pay off a $70 million bank line, and also reported additional reserve charges in some commercial lines including workers' compensation.

Fitch ratings says the announced reserve charges for the third quarter of between $75 million and $105 million are in the same lines — workers' comp, commercial multi-peril liability, other liability and commercial auto liability — on which the company took reserve charges of over $300 million in the second quarter.

Due in large part to those reserve charges, Tower reported a second-quarter net loss of $507.3 million, announced a workforce reduction, and issued a statement casting doubt on its “ability to continue as a going concern.”

A Nov. 15 letter issued to business partners by Tower President and CEO Michael H. Lee, though, stated Lee's belief that the company would be able to meet all of its obligations, “including to our policyholders as well as our lenders.”

Fitch says the sale of Tower's 10.7% equity stake in Canopius to Bregal Capital LLP, and Tower's statement that it will use the proceeds to pay its outstanding $70 million bank line, “is a favorable development.”

Tower had acquired the 10.7% stake in Canopius in August 2012 for $71.5 million. Canopius was sold yesterday to Japan's NKSJ Holdings.

Fitch adds, “[Tower's] next maturing debt obligation is $150 million of 5% convertible senior notes due Sept. 15, 2014.”

The ratings agency says it will review Tower's ratings again once the company files its third-quarter GAAP and statutory statements.

Fitch downgraded Tower's insurer financial strength rating to BB from A- in October after Tower announced the reserve charges it was taking for the second quarter.

Tower's Challenges and Options

Following Tower's previous statements about continuing as a going concern and Lee's letter stating his optimism that the company will indeed meet its obligations, Fitch Director Gerry Glombicki told PC360 that Tower likely feels it can emerge from its difficulties, as Lee states, but as it did not have immediate concrete access to liquidity, it issued statements saying so.

He said Tower had three different classes of debt: the bank-loan facility — which Tower has now paid off with its sale of its Canopious stake — the $150 million of senior convertible debt due in September 2014, and $235 million in “very long-term” subordinated debt that is due beginning in 2033.

Glombicki said Tower's issue is one of liquidity. To service debt, he said, the largest source of funds would be dividends from subsidiaries, but those units can only send the money to the parent company if they meet certain requirements, and each state has its own dividend laws.

That uncertainty about the immediate availability of those funds, Glombicki said, is what led to statements last month about the company having no concrete assurances or commitments to get liquidity immediately.

He said the company's statements and Lee's letter essentially is Tower saying that it believes it will be fine, and that it has plans to address the liquidity issues, but there is nothing concrete in place; the company would have to disclose if there was.

Glombicki said Tower has three options it can pursue. First, he said the company could sell to a “white knight” who would come in and provide liquidity. This option is “nice and clean,” he said, but Tower's problems would be inherited by the new company.

Additionally, Glombicki said a “white knight” would not want to pay a lot for the company, and management may not want to accept a low value if it feels the issues are only a “temporary blip.”

The second option would be to sell parts of the company, Glombicki said. He said Tower would get capital in this case, but then would not get fee income from the sold parts. He also said Tower might not get full value if it can't find the right buyers right away.

Tower's sale of its Canopius stake to pay off the bank credit facility would be consistent with this strategy.

The third option for Tower, Glombicki said, would be to get additional partners to come in — possibly a hedge fund.

Tower did not respond to a request for comment.

Special Reports /

Tower Group Pays Off $70M Bank Line; Announces More Reserve Charges

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