What Arrow's Results mean for Lowell

All,

In short, nothing has fundamentally changed yet. Arrow’s results are an extension of a trend the market has been observing for a while. However, it does little to calm our nerves over our investment in Lowell, which is partially predicated on management saving costs and bringing its operating cashflow back into an observable balance. 

Arrow Global released their FY18 results today. 

We don’t like them. There is a debate raging as to how to look at the financials of a debt purchaser (funny, given funds are actually very similar). 

While the company is calculating all kinds of ratios, we note that it continues to fail to produce any positive operating cashflow. I.e. the company is neither earning its CapEx, nor its interest. As a result leverage outstanding has swollen from £ 0.935 bn in 2017 to £ 1.183 bn in 2018 - or by 25%. We are also not observing any trend suggesting the situation is improving. 

Markets have taken the news in their stride, as the company continues to excel on a great deal of self-invented metrics that however lack any footing. 
On another note: the ECB's halt to rate rises for the remainder of the year and other initiatives unveiled yesterday should go a long way to alleviate many investor’s fears that debt collector’s books fall out of balance on high interest rates. 

So what does this all mean for Lowell:

1) Arrow now has a cost of debt of 4.9% - significantly lower than the 6.6% of Lowell - due to the more conservative leverage of its 10 year ERC book at 60%. Arrow is 75% levered. Both are levered beyond their book value Lowell more so. Like Arrow, Lowell are not earning their CapEx or Interest. 

2) Another similarity is the defiance with which both companies meet the debt market. Neither seems to be willing to address bondholder concerns.

3) One difference is Lowell’s recent acquisition of the Nordics business. But unless that business pays significantly lower Q4 bonuses than the rest of Lowell (unlikely to be sustainable) then Lowell are running a E100m deficit relative to their replacement rate. That seems to have widened - with increased size perhaps, but not narrowed. 

4) As always this is mitigated by the fact that these companies are pushing a bow wave of upfront costs that disappear if sent into run-off. But to prevent that, they will either have to yield to the HY market’s concerns or find alternative sources of capital. The latter seems to be slow moving. 

Wolfgang