Lowell bonds

All,

DB yesterday also published a long report on Cabot and Lowell. It’s fair to say that DB have a much more wholistic grab of the situation than JPM displayed in their note the other day.

Having to be more politically correct than us, DB almost make a very valid point: That for a debt collector Cash EBITDA Leverage and CF Interest Coverage are entirely de-coupled. Moreover, the former is relevant for the equity and the latter for creditors and therefore also relevant to the equity. For Lowell to get both under control its best bet is to grow fast (dilute its high leverage) and find operating savings through either revenue or cost synergies. While certainly available, for management cost synergies are the last on the menu, because with ongoing growth employees (costs) can be redeployed more profitably along the way as opposed to laid off (severance cost) and newly hired (training cost). So as we’ve said before, shareholders are taking us for a bit of a ride. Hence the trading levels in this market.

The company is an overall sound operation and has the wherewithal to address its negative NCF. But given the little understood business model, above described incentives and uncertainties and a lack of events in the short term, Lowell are trading with a high beta. In the current risk-off environment we are therefore holding enough, but keep monitoring the name for potentially attractive opportunities on the way up.

Wolfgang