Lowell: Implications from Arrow's call

All

It isn’t news that Arrow are following the same trend as the majority of the debt purchaser market in doing less of just that. That is because it is not profitable. Debt purchasers are steering their businesses out of the space of competitive auctions for new portfolios and towards capital light alternatives - in Arrow’s case a “fund management” idea, similar to what we’ve heard from Lowell. Even better are direct deals with portfolio owners/sellers that secure non-competitive supply of business in the future.

Cashflow:

- Today’s results saw quarterly purchases slow down again, which freed up enough cash to leave it OCF flat for the quarter. CapEx was kept low and, again, financing needed to make up for CapEx and interest.

- Despite all the wonderful language and equity market targeting data points on growth profitability, we feel the need to remind ourselves that the strategic shift is necessary because access to HY funding is less than certain and because the first of these companies (Lowell) now have limited time to find ways to - in the words of Lee Rochford today: “accelerate us towards being self-funding”. Troubles by one of the players to re-invent themselves in time could erode confidence in the sector.

Fund Management:

- Even with the future vertical split of the balance sheet into fund silos, we wonder where the equity for those silos is supposed to come from.

Implications for Lowell (shorter maturities):

- We have recently traded out of Lowell. While the monetary policy music is playing, these names are likely to see strong demand and should trade well. Swathes of the market are only looking at Cash EBITDA and similar metrics - happy for any excuse to overlook fundamentals.

- Only from a fundamental perspective we are no longer comfortable with the risk. It’s entirely possible that Lowell can refinance its bonds now, but we’d rather not be part of it.

Wolfgang