Sectors > Top Reports > Lowell Memo 240820

Lowell Memo 240820

Lowell. £ 11% 2023 SNs More Likely To Be Impaired With c. 0% Recovery Than To Be Generously Taken Out. CDS Orphaning Is Possible But More Likely To Pay Off c. 100%
PUBLISHED: 24 August 2020
SUBMARKET: Lowell, Top Reports, Top Reports,


Why Read?

  • Understand how we estimate Lowell’s portfolio sales at £76m in Q2 20 LTM and the impact of restating its Cash EBITDA, FCF and net leverage excluding this benefit
  • Understand why we expect Lowell’s and its sponsors’ next move to be to re-attempt Scenario #1 (equity injection for SSNs maturity extension / upsize) but see a second attempt as likely to fail
  • Understand how we expect Lowell’s sponsors and SSNs holders to work together to create additional equity through impairing the £ 11% 2023 SNs
  • Understand the extent of likely temporary cost reduction in Lowell’s Q2 20 Cash EBITDA and how we restate Lowell’s Q2 20 LTM Cash EBITDA margin at 48.8% vs 55.1% reported (or 54.1% excluding litigation cessation impact) 
  • Understand why ERC in Q2 20 increased quarter-on-quarter even though portfolio revaluation was negative and portfolio purchasing in the quarter was in line with the company-disclosed ERC replacement rate
  • Understand our quarterly estimates of Lowell’s portfolio sales and true (positive) ERC revaluations excluding tail roll-in
  • Understand our updated evaluation of scenario probabilities following Q2 20 results and expectations for CDS orphaning vs restructuring vs bankruptcy credit events and existence of a deliverable at the time of any potential CDS auction for Lowell CDS

What’s New?

  • Quarterly estimated portfolio sales and true ERC revaluations (excluding tail roll-in)
  • Restating Lowell’s financials to remove the effects of estimated portfolio sales and temporary cost benefits
  • Scenario-by-scenario evaluation of Lowell CDS outcomes – orphaning vs restructuring vs bankruptcy credit events and deliverability

Questions Answered

  • How is Lowell able to generate DP collections as achieved in H1 20 when its Group actual : estimated collections was at 94%?
  • Why has Lowell’s ERC replacement rate been falling even though its 180m ERC is up c. 25% since Q2 18 (post the Nordic Carve-Out acquisition)?
  • What was the impact of UK staff furloughing and DACH reduced working hours and other temporary collection activity cost savings in Q2 20?
  • Who buys “secondary” NPLs from Europe’s large CMS firms and on what all-in net IRRs?
  • What are the differences in ERC modelling across firms, both in terms of modelling approach and resulting range of ERC valuation for the same portfolio?
  • What is the audit process for ERC?

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