Bad news for Tower Group International and its subsidiaries: A.M. Best has downgraded the insurer’s financial strength ratings, as the carrier works through the steps of a planned merger with ACP Re.

A.M. Best now rates the pooled and reinsured members of the Tower US Pool (Tower) and CastlePoint Reinsurance Company, Lt. (Bermuda) as C++, or “Marginal,” down from B, or “Fair.” A.M. Best explained it is concerned about Tower Group’s financial liquidity, and the risk that it is overextended financially.

“These rating downgrades reflect the group’s significantly elevated financial leverage, constrained liquidity and heightened uncertainty around [Tower Group’s] ability to repay its senior debt holders in the event its pending merger with ACP Re … does not occur,” A.M. Best said in its statement announcing the ratings downgrade. “Continued delays in [Tower Group’s] reporting its quarterly filings are another concern.”

The move comes not long after Tower Group’s announcement that it, and ACP Re, have amended their merger agreement. Among the changes: holders of Tower’s common shares will now receive a per-share consideration of $2.50 per share, down from $3 per share. Also, if the merger agreement falls apart, then Tower will pay a reduced termination fee versus what was required in the initial M&A deal. Both parties announced in January a merger agreement valued at $172 million at the time.

Among other hits, A.M. Best reduced issuer credit ratings to “b” from “bb” for both members of the Tower US Pool and CastlePoint Reinsurance. As well, parent Tower Group International now has a “cc” issuer credit rating, down from “b-.” A similar ICR rating dip hit Tower Group’s $150 million 5 percent senior unsecured convertible notes due September 2014, according to the A.M. Best release.