Lowell - Sound or Not

All,

Please find our updated analysis on Lowell here.

Q323 has been uneventful. Neither did the company sell any further portfolios, nor did it produce any other outstanding results or forecasts. As a result, the update is really only incremental and our view has not changed. An investment in these bonds is not fundamentally sound. But we think the improving Cash EBITDA Leverage stats will get at least half the market excited once again and so we are in for the ride for a few quarters.

Investment Rationale:

- We continue to hold our 2% of NAV position in the 6.75% € notes with a view to benefiting from a Cash EBITDA deleveraging over the next months, most of which should be visible by September 2024, when Q223 results are published. We expect to be earning at least the ~10% running yield on the bonds as well as some 10 points of upside (from 78) on the back of improved cash flow and Cash EBITDA Leverage to 3x or below, where large parts of the market seem keen to refinance the company. We are likely to trade out again in Q224 before any actual refinancing discussions commence. 

- To be clear, we think Cash EBITDA is nonsense, but the way the accounting works, Lowell's credit profile should have improved in most ways, except LTV. On the downside, we do not expect any material negative news from Lowell between now and April, nor do we expect the market to suddenly no longer use Cash EBITDA. So it's not a fundamental trade, which is why we only commit 2% to the name, despite the limited downside we perceive over the time period. 

Update Q323:

- Contrary to our expectations, Lowell did not bring another portfolio sale underway in the quarter. This does not change our mind as to future portfolio sales, but it does mean - provided transactions remain small - that the company should slip under the targeted 3x Cash EBITDA Leverage mark only a quarter later than we had estimated, so in H124 and that we will learn of it only after summer.

- At a 2x GMM, we have the company losing approx. £25m / quarter (£100m p.a.). In our model, we are therefore assuming a slight shortfall in replacement purchases, as we have seen over recent periods. Buried under various portfolio transactions this is hard to see and won't trouble the market. But it's still a staggering amount relative to Lowell's cost position.

Here to discuss with any of you. Happy 2024 everyone!

Wolfgang

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