S&P Takes Favorable View of Trenwick’s Financing Agreement

December 13, 2002

Standard & Poor’s Ratings Services has issued a comment on Bermuda-based Trenwick Group Ltd.’s recent agreement in principle with its Lloyd’s letter of credit providers which will allow it to continue underwriting at Lloyd’s in 2003. (See IJ Website Dec. 9)

S&P, which currently has a ‘CCC+’ financial strength and counterparty credit rating on the Group, and has kept it on CreditWatch with negative implications, said it “believes this development is favorable for the company and will provide additional time to negotiate the refinancing of its $75 million of senior notes, which are due in April 2003, as well as its several outstanding preferred stock obligations.”

S&P noted that “The letter of credit is reduced to $182.5 million from $230 million and is extended from Dec. 31, 2005, to Dec. 31, 2006. Trenwick will further satisfy its Lloyd’s solvency deficit of about $100 million with payments from LaSalle Re Ltd. and the proceeds from the Cat E Put settlement with Swiss Reinsurance Co. The creditors will also allow Trenwick to make a cash payment of about $14.4 million to support capital requirements for year-of-account 2003.”

The banks will receive a 5 percent cash fee, warrants equal to 10% of Trenwick’s equity capital, and the right to receive 15% of the profits earned by Trenwick at Lloyd’s for the 2002 and 2003 years of account in return for their extensions.

Trenwick is also under obligation to satisfy “several new affirmative covenants covering the management of obligations at its runoff companies, including specific financial tests and a commitment to refinance the $75 million senior notes by March 2003 and collateralize the letter-of-credit banks by Dec. 31, 2003,” S&P said.

It has agreed to limit the type of business that can be undertaken and to limitations on the assumption of financial and other obligations. Part of the agreement includes provisions that should there be a termination of Trenwick’s current arrangements with Chubb Corp. or Berkshire Hathaway, it would constitute a default

S&P said it expects to “meet with management over the next few weeks to fully review the implications of the agreement and status of the senior debt negotiation. The CreditWatch status of these ratings is expected to be resolved when the negotiations on the April 2003 debt maturities are concluded.”

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