Lowell - Permira's turn now

All,

we are surprised that Lowell - not a Covid-19 casualty - did not manage to reach an agreement on refinancing. Not because we think the debt is money-good, but because of where the market is and because the shareholder has offered to inject substantial cash too - effectively paying down the pre-Covid-19 drawn amount of the RCF. 

Fundamentally:

- The company continues to burn cash on a normalised basis, mostly camouflaged by its portfolio expansion and exacerbated by the high cost of capital it has to service. If, like Intrum, it would attack its cost base more effectively, the argument to drop coupon would logically follow and a deal would have been that much more achievable. But we are repeating ourselves… 

- As regards upsizing the RCF, it constitutes yet further layering of the bonds. But without it the company is unable to take part in the next wave of credit purchases as liquidity is just not strong enough to permit a sufficiently meaningful roll into the new vintages.

Legally:

- Bondholders need to use this opportunity to tighten their language so as to avoid being layered going forward.

So the deal seems to have fallen through only narrowly, but for the right reasons on both sides. Permira’s easiest way to achieve the sought coupon reduction should be to ask management to finally prioritise cost cuts. This may require a shift in management’s own understanding of Lowell’s profitability and so we are only cautiously optimistic. 

We remain on the sidelines.

Wolfgang