Lowell: New Year Resolution

• Just before Christmas, Lowell reached agreement with over 48% of its holders of the existing Euro SSFRNs and SSNs and GBP Notes for a potential restructuring transaction, more thorough-going than Intrum’s, but still only a first step in our view.
• The large ABS and RCF will remain in place, with the ABS retaining its most favoured status and the RCF asked to roll to 2028. Agreement from the RCF, almost fully drawn at 3Q24, is requested. The layering by the ABS facilities remains a significant impediment to bondholder recovery for the new notes given over-collateralisation.
• The proposed transaction has been structured to impose credit discipline on Lowell, somewhat ironic given Lowell’s day job. It is not designed for full run-off, but certainly is engineered to direct more focus on monetising the balance sheet in favour of creditors. The transaction stipulates that 100% of net cash proceeds realised from geographic disposals and BSV initiatives shall be applied in mandatory debt prepayment subject to £150 mn 12-months minimum liquidity.
• Lowell had already shifted its investment strategy by pulling out of its dubious DACH NPL activities, but tighter covenants would put more of a straitjacket on strategy, which is a positive. We continue to believe that more disclosure on the DACH setback is needed to really understand operating momentum at the Group, and this would be needed now to assess future upside for the new PIKs.

Relative Value

Lowell’s pre-Christmas announcement of partial agreement for a proposed debt restructuring ends a bad year for debt collectors on a modestly positive note. A 75c reinstatement, sweetened with a base case of 10c of cash, but suffering 15c worth of Holdco PIKs is not going to get anyone banging the table given current levels. However, it is a reasonable enough first step in a necessary balance sheet clean up. The proposal is for £1.6 bn of bonds to be reinstated as ~£1.2 bn of new Opco notes and £250 mn of HoldCo debt, with a cash pay out of ~£165 mn (10c) as an incentive. RCF and ABS retain their par claim albeit the RCF would be termed out by three years.

Bonds spiked over 6 points from around the ~60 level after the proposal reflecting the enhanced role of creditors, and the 10c cash component offsetting the theoretical haircut. Evidently, the HoldCo PIK is largely option value at this juncture economically speaking unless more material deleveraging and sharper execution improve outcomes further down the line. It may offer an interested party an avenue to control should they so desire it.