Lowell - More Trick than Treat - How the Halloween Scenario works.

All,

Please find our updated analysis of Lowell here. 

Having long collected debts on either side of its balance sheet, Lowell now seems to collect restructurings. The currently rumoured LME seems only the second of three rounds. Looking forward to more trick than treat, we arrive at mere nuisance value for anyone not participating in the LME. Having always struggled as an investment case, Lowell has a promising future as a case study.

Investment Considerations:

- We are not taking a position in Lowell and are unlikely to do so for the foreseeable future. We are projecting meaningful recoveries only for those creditors who participated in the New Money Notes and their x-holdings in the SSNs, but expect only nuisance value for everyone else. If the New Money Notes and x-holding SSNs, each led by the same large creditor, control a majority of the SSNs, then they could force an Up-Tier transaction now and in a subsequent UK restructuring plan take control of the company, cramming down subsequent classes of o.o. money creditors. We understand that the wheels for the LME are already in motion.

- On the upside, a failed LME and pari-passu treatment would arithmetically lead to a 45/£ recovery.

- Surviving point from last IM: "To become interested in the bonds, we would have to be able to buy them at a discount to our theoretical value that reflects the cashflow pressure to sell the company quickly. Given the narrow buyer base and execution risk / cost, a price of 45p/£ springs to mind. That sounds far off, but if we are right and bondholders are looking for the fire exit before the year is over, we could be tempted then." Considering the power of the creditors in the New Money Notes and no company sale in sight, we are not.

Key Insights:

- Lowell’s first restructuring round is complete, but a second is already in motion, with signs pointing to a multi-phase process culminating in a UK restructuring plan (Current Trading; Recap Scenario).

- The currently rumoured up-tiering of a subset of SSNs makes sense and appears to be an interim step—likely Round 2 of 3—paving the way for a final UK restructuring plan in which participating creditors and shareholders agree to cram down residual OpCo and HoldCo claims (Recap Scenario).

- Under this scenario, New Money Notes would likely recover par; participating SSNs c.75p/£ and, where they provide new cash, gain 97% of the equity. Non-participating SSNs, HoldCo PIKs and shareholders would be left with nominal “scrap” recoveries, the latter receiving just enough to facilitate the deal (Recap Scenario).

- Residual SSNs may appeal, but given subordination by new money, contractual softening under NY law and limited recoverable value, prospects are poor (Recap Scenario).

- The new Round 1 capital structure leaves Lowell as a smaller entity burdened with the same unsustainable interest load that broke the previous (larger) balance sheet. Flexing Gross Money Multiple assumptions does not produce any feasible path to positive cash flow (Model).

- Guidance for future collections is sharply below LTM levels. The outlook still implies an unusually weak collection engine (Current Trading).

- Even under optimistic DCF inputs—low beta, mixed risk premium favouring Nordic exposure, aggressive growth and a 6.5% pre-tax cost of debt—the valuation barely approaches book ERC, and there is no realistic capacity to service OpCo SSNs (DCF).

- Higher portfolio purchase yields are offset by accelerated book churn, forcing ongoing ERC replenishment and leaving net cash outflows unchanged. The deep cut in collection guidance and opaque cost base make credible forecasting nearly impossible (Model).

Miscellaneous:

- Instead of churning the book faster, Q225 guidance for the next 24 months suggested much lower collections. This is sensible, but it documents the small debt capacity following BS velocity.

- Rising costs to collect: According to Intrum, ageing books are more expensive to collect on and Lowell are now at 97% of static pool, mostly due to the difficult consumer environment in the UK. 

- A requirement to write off the remaining goodwill could trigger the timing for a Round 3 UK restructuring plan, in which the asset write-off should come in handy.

- On its current setup and without balance sheet velocity programs, the company should be running out of cash within 12 months.

Here to discuss this name with you.

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk