Lowell Memo 120919
- Understand why Lowell will likely need portfolio sales and positive ERC revaluation to achieve its “deleveraging” target (on which its ability to refinance debt likely depends) and why this would hollow out future cash generation and leverage would subsequently spike
- Understand why orphaning risk on Lowell’s CDS is likely over-estimated by the market and why the payoff from buying CDS would likely be substantial (100% payoff) in the event of Lowell entering UK administration or restructuring debt via UK schemes of arrangement and US Chapter 15 filing
- Understand administration with portfolio sales or debt restructuring with long term run-off scenarios and our estimated senior secured notes recovery rates of 44% and 39% respectively
- Understand how Lowell’s additional debt baskets, governing law and corporate structure can undermine senior secured notes recovery further than our estimates and increase the chance of a substantial payoff from buying CDS
- Understand why the biggest risk to the bears is Lowell’s ability to ensure it achieves its deleveraging target (and thereby ability to refinance) through portfolio sales and positive ERC revaluation if disclosure is not provided on these elements
- Understand cash trapping risks in typical debt purchaser securitisation facilities
- Understand why we believe Lowell’s liquidity is substantially weaker than most other credit management services firms
- Understand Lowell’s cost structure versus other credit management services firms and why its business model is strained as a result
- Illustration of accelerated deleveraging scenario through portfolio sales and positive ERC revaluation
- What would happen if Lowell cannot refinance – analysis of administration and restructuring scenarios based on the specifics of Lowell’s security package, baskets, notes / RCF / intercreditor agreement governing law, corporate structure and feasibility of selling portfolios en masse or implementing a run-off in practice
- Restrictions imposed by the RCF Agreement on Lowell’s likely future purchases of its £ 11% 2023 senior notes
- How Lowell’s positive ERC revaluations in the outer years of its ERC curve have been substantial in H1 2019 on our estimates
- What is the range of bid covers (i.e. difference between winning and next bids) in different types of NPL portfolio auctions / tenders and what does this imply for the sale price of Lowell’s portfolios in an administration scenario?
- Is a long-term run-off of Lowell feasible in practice and what challenges would be faced?
- What would happen with Lowell’s securitisation facility in the event of an administration or debt restructuring and what would this mean for surplus cash flow Lowell can access?
- What scope is there for large basis holders to achieve a substantial pay-off on Lowell CDS in a debt restructuring scenario?
- What did we like and dislike from Lowell’s recent Q2 2019 results?
- Why is Lowell’s cost structure so high relative to other credit management services firms?
- View, Variant Perception & Recommendations
- Can Lowell Refinance?
- Administration / Portfolio Sale Scenario
- Debt Restructuring & Long-Term Run-Off Scenario
- Security, Baskets For Additional Debt & Governing Law
- Bond Buybacks & CDS Orphaning Risk
- Cost Structure Analysis
- Securitisation - Cash Trapping Risk
- Q2 2019 Results
- Appendix 1 - Estimating Steady State FCF
- Appendix 2 - Portfolio Amortisation Dynamics