Lowell - downgraded for all the right reasons
All,
Conclusion:
We agree that the company is over levered. While Moody’s are looking for improved P&L stats however, it's the NCF that really counts. Lowell is one of those companies where the former will move without the latter.
News: Moody’s rated/re-rated a number of debt collectors on Friday.
Intrum: BA2 affirmed
Arrow: BA3 affirmed, but outlook changed to negative
Lowell Holdco 2 (SUNs): Downgraded to Caa2 from Caa1, but outlook changed to stable.
Lowell Holdco 3 (SSNs): Downgraded to B3 from B2, but outlook changed to stable. Same action for Corporate Family Rating overall.
On Lowell:
We think Lowell were downgraded for all the right reasons, even if we disagree with Moody’s approach to measuring the company’s economic viability. Moody’s cite: negative return on assets, high leverage - with 16% of 120 month ERC encumbered, maturity concentration in 2022/23 and “weak’ cashflow generation. Moody’s also voice the concern that as a result the company now has “more limited access to public HY markets compared to peers” - which presumably is code for: no access. Moody’s stable outlook takes into account an improvement in profitability metrics, but not for the coming 18 months. These improvements will, however, be the result of a natural shift in a number of curves within the portfolio as the level of new purchases relative to the overall book is expected to slow down in line with the level of collections relative to its Total ERC portfolio. The formulation that the CF generation is “weak” is equally euphemistic. FCF still does not cover even half its interest bill.
Thoughts:
- The downgrade is timely. At its current level of CF generation / Cash EBITDA leverage, the company will not be able to refinance. We include the latter metric only because a fair share of the HY market is still using it - despite its obvious flaws. There is a chance that the latter metric alone will give the company access to financing again.
- Our earlier assumption that the situation might come to a head as early as Q120 may no longer hold. The company revealed an agreement with its ABL lenders to re-set the ABL line to £255m over the next 18 months. This should take some weight off the effectively Super Sr. RCF when looking to extend.
- The company will likely have access to further ABL financing regardless of immediate profitability. Clearly this won’t help the bonds or therefore Lowell's maturity profile.
- We continue to believe that the company could turn itself around by reducing OPEX in the order of 5-10%. Something that appears entirely doable for a company that has historically never addressed its cost base and has grown via acquisitions. However, the latest call affirmed that even the new CEO (ex CFO no less) has no plans to pursue that route. Any further deterioration in market sentiment could be materially harmful.
Our position in the 8.5% 22s remains at this stage unchanged with 5% of NAV, but mainly due to our differences with management we are keeping an increasingly watchful eye.
Wolfgang