Sectors > Top Reports > Lowell Memo 240419

Lowell Memo 240419

Sell senior secured - c. 50% base case downside
PUBLISHED: 24 April 2019
SUBMARKET: Lowell, Top Reports, Top Reports,


Why Read?

  • Understand why Lowell’s lifetime cash generation falls a long way short of being able to cover its senior secured debt and how senior secured is only covered 48% in our base case
  • Understand the extent to which Lowell’s focus on  low balance, non-paying consumer unsecured portfolios leave it with too high a cost structure relative to the gross cash collections on portfolios owned and 3PC commissions
  • Understand what it would take for Lowell to grow into its capital structure and why this is unlikely
  • Understand how aggressive Lowell has been relative to peers in extrapolating recent years’ collections outperformance through its entire 180 month ERC horizon and how vulnerable its ERC is to downward revision
  • Understand the key bull v bear debates on Lowell
  • Understand catalysts and risks for the short thesis
  • Understand tactics likely to be used by Lowell management and Permira as Lowell approaches its debt maturities in 2022

What’s New?

  • Cost structure analysis across debt purchase and third party collections segments for Lowell vs peers
  • Decomposition of Lowell’s valuation – debt purchase v 3PC segment; in-force vs new business value; major components within in-force valuation
  • Valuation sensitivity analysis – Lowell needs to realised at least a 3.1x gross money multiple on all new portfolio purchases for the next 15 years and 18% collections outperformance on its end 2018 ERC to grow into its capital structure
  • Gross money multiple expansion post pricing – analysis by vintage and implications for Lowell’s ability to generate hidden value from its ERC
  • Right-sizing the Lowell capital structure from a variety of perspectives – “correcting” acquisition prices paid and financing thereof; moving to an all-securitisation structure

Questions Answered

  • Why is our valuation of Lowell so low?
  • Can Lowell grow into its capital structure and what would it take to do so?
  • How much worse are the economics (cost structure, gross collections and 3PC commissions and IRRs) of Lowell’s low balance, non-paying consumer unsecured portfolios compared to larger balance financial services portfolios?
  • What will Lowell and Permira do as we get closer to Lowell’s debt maturities in 2022?

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