Lowen Play - A double 00?

All,

With the High Yield market buoyant most market participants were expecting a refinancing of the Löwen Play bonds. However, they have traded off as the possibility of a refinance has receded over the last couple of days. Löwen Play have appointed Rothschild to reassess their finances and assess their financing options.

The Problem:

- Löwen Play have a €350m Senior Secured Notes maturity in November 2022.

- Despite strong cash conversion and high variable cost component, there is significant headwinds from regulatory changes limiting the number of machines at a location, which has reduced top-line and cash generation of the Company.

- The business is extremely asset light with nearly all machines on leases, and 2/3rds of the machines can be returned to the supplier within two months if regulatory changes requires further sites to be closed.

Update to Bondholders:

- As part of discussions with bondholders, Löwen Play has shared additional information in relation to operations in July and August. This performance may be in line management expectation, but remains below both 2020 and 2019 performance.

- There is currently a presentation on their IR site which is seen as a cleansing document for bondholders who were in discussions on a refinancing.

- Although GGR is marginally improving over recent 4 week periods, Revenue development has declined over the last couple of months, due to decline in number of machines in operation due to regulation.

Underling Market:

- There remains significant regulatory pressures on the business. The Interstate Treaty will reduce the number of AWPs in 2021 by 1,200 (c.13%), the majority in Baden-Württemberg, where the state legislators are expected to adopt all measures of the Treaty without exemptions. Other states are expected to contemplate exemptions but there is limited clarity on what level of exemptions and how that would impact Löwen Play.

- The wider arcade industry is still significantly fragmented with the largest six operators accounting for 20% of the market. Löwen Play is the 2nd largest player, but #1, 3 & 4 are integrated machine operators who also manufacture the gaming machines. In fact, Löwen Play lease 55% of their machines from #1 (Novomatic) and 40% from #3 (Gauselmann).

- The great hope for Löwen Play is to leverage off their market position to launch online gaming. There is no doubt in the opportunity set of the growth in online gaming, but we at Sarria are not convinced Löwen Play’s experience in running arcade sites provides significant advantages over other pure online operators.

Positioning:

- We have remained negative on the name for the last year, but have not taken a short position due to the buoyant refinance High Yield market. We expected investors would refinance the bonds on a post-Covid recovery trade despite our and the market’s scepticism of the market.

- However, it appears the High Yield market has some boundaries and the refinancing has been put on hold.

- With bonds trading at the low 90’s we are re-examining our model. However, with limited assets, albeit a significant variable cost base, we remain cautious on the name.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk

T: +44 20 3744 7009

M:+44 7786 705 806

www.sarria.co.uk

Tomás MannionLOEWEN