Lowell Memo 140820
- Understand why Plan A (deleverage to refinance) is likely all but finished and how Lowell’s deleveraging and Cash EBITDA margin widening since Q2 19 is more than fully explained by our estimates of its portfolio sales which gross up collections, Cash EBITDA and FCF
- Understand why Plan B (equity injection to extend SSNs maturities and at potentially lower coupons) is likely the only out for Lowell’s £ 11% 2023 Senior Notes (SNs) and CDS referencing these and why it is the least worst or second least worst option for the Senior Secured Notes (SSNs)
- Understand Plan C that we expect restructuring advisors will be advising for Permira (with respect to Lowell) – how a first implementation of this destroys SNs recovery and a second materially impairs recovery for SSNs
- Understand why Permira could yet walk away and how low SSNs recovery would be in our Administration & Portfolio Sales and Restructuring & Run-Off scenarios
- Understand our evaluation of scenario probabilities
- Understand how SSNs vs SNs cross-holdings, naked CDS positioning and basis positioning could impact the eventual outcome
- Understand scenarios that lead to CDS orphaning vs those (more likely in our view) that lead to a c. 100% payoff from CDS
- Understand how materially positive Lowell’s true (excluding ERC tail roll-in) portfolio carrying value and ERC revaluations have been since FY 16, the extent to which Lowell extrapolates current period collections outperformance right the way through its ERC tail and the extent to which a buyer of its portfolios in the secondary market might re-underwrite its ERC negatively, factoring in bid covers in portfolio auctions
- Understand the sources of Lowell’s lifetime cash “hole” under our various models
- Detailed evaluation of Plan C for Permira / Lowell and the impact for SSNs and SNs
- Assessment of Plan B (the recently attempted refinancing) – why Permira likely does not have much further flexibility on this and why SSNs should get back to the table and concede some ground or work with Permira / OTPP on a version of Plan C that is favourable for SSNs but destroys SNs
- Live financial projections, DCF and In-Force & New Business valuations and sensitivities incorporating COVID-19 impact and Lowell’s “Preliminary Trading Update” of 27/07/20
- Updated Administration & Portfolio Sales and Restructuring & Run-Off recoveries for SSNs and SNs
- What will Permira do next and with what impact for SSNs and SNs?
- What are the competing interests that make Plan B (the recently attempted refinancing) challenging to implement?
- Why might SSNs holders eventually be the ones to give ground on Plan B?
- What is structurally wrong with Lowell’s pricing of portfolios in DP and servicing contracts in 3PC?
- Why is the most hostile version of Plan C the highest return for Permira / OTPP?
- How might the sponsors and SSNs holders team up to the detriment of SNs?
- What is the extent to which Permira / Lowell overpaid for acquisitions and what is the resulting excess debt in the capital structure?
- View, Variant Perception & Recommendations
- Plans A & B Have Failed (So Far). Permira’s Plan C
- Administration (Portfolios Sold): SSNs Recovery 16-36%
- Debt Restructuring & Run-Off: SSNs Recovery 35-43%
- DCF And In-Force & New Business Valuations: Base Case SSNs Covered c. 50-56%
- Higher Cost Structure For Similar Gross Money Multiples vs Competitors & Loss-Making 3PC
- Permira Paid The Wrong Price For Lowell’s UK Business In 2015. Over-Priced, Debt-Financed Acquisitions
- Lowell, Intrum, Arrow & Cabot Compared
Appendix 1 – In-Force & New Business Valuation Methodology
Appendix 2 – Steady State FCF Estimation Methodologies
Appendix 3 – All-In Net IRR Estimation Methodology
Appendix 4 – Security, Baskets For Additional Debt & Governing Law
Appendix 5 – Historic Financials
Appendix 6 – UK Schemes Of Arrangement