Lowell - Can they have their cake and eat it? - Positioning

All,

Please find a slight update to our analysis here.

We have been slow to put this trade on. As flagged before, we are not fans of Lowell and find the company beyond its immediate asset value to be fundamentally worthless. But we do recognise that an entire sector chooses to trade these names on the Cash EBITDA metric, even if that is entirely manipulable. So this is really a trading position where we perceive limited downside for a while and are looking to benefit from some window dressing.


Investment Rationale:

- We are taking 2% of NAV in the 6.75% 2025 at 78c/€ today with a view to earning a 10% running yield and some 10 points - half the way to a refinancing - on the back of improved Cash EBITDA stats, even if we don’t believe in them. 

- The fact is that large swathes of the market do believe in this figure and appear quite ready to help refinance this company. 

- On the downside, we don’t believe much will be visible between now and year-end. We think the worst that could happen is that Lowell fail to put another ABS transaction/deconsolidation underway and so disclose their true underlying cash burn.

- We don’t expect Permira to inject any further cash, but we don’t think this discussion will take place before H224 - after we have seen the Cash EBITDA deleveraging. 


Eating the cake:

- Lowell have been selling their portfolio little by little over the last four quarters in what looks like a strategy to manipulate Cash EBITDA. 

- We have unwound those transactions as best we can, revealing an underlying cash burn that leaves most of the interest uncovered. 

- However, we don’t think this will be visible in the near term as portfolio sales wash through the income statement just like collections do and therefore improve operating cashflow and Cash EBITDA while paying down the RCF.


Having it:

- Portfolio sales at book value should do little to deleverage a company that has over 100% LTV, if not the opposite. 

- In the scheme of things, however, we still regard these transactions as relatively small.

- To refinance, Lowell will need to show more liquidity if Permira can at all avoid the call to inject yet more cash. 

- So we expect Lowell to liquidate enough of the book to address bondholder liquidity concerns and possibly chip some money component into a refinancing. 


Here to discuss,


Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk

Wolfgang FelixLOWELL