Lowen Play - playing and winning the state aid game
All,
Please find our unchanged model here.
Lowen Play are an arcade operator but for majority of FY21 they have played the state aid game and won. They have received €78m in state aid during the FY21 - to put in context Adj EBITDA in FY18 and FY19 was €111m and €94m respectively. Underlying performance has been impacted by Covid closures and changing legislation and it is against this background the Company are attempting a refinancing of their €350m Nov 22 bonds.
State Aid:
- Lowen Play received €78.3m in total in state aid during FY21. They received €30.4m in April 21 for November and December 2020 closures. This was followed by €12m received in May 21 for closures during H1 21. Subsequently, Lowen Play applied for additional state aid and received a further €36.6m in November (albeit this was an overpayment and requires them to repay €0.7m in December).
- All State Aid amounts are subject to audit, but all granted and received state aid are non-repayable but subject to tax.
Underlying Performance:
- With the majority of arcades opened for the July-Sept quarter for both FY21 and FY20, revenues were 15% lower in Q321 versus prior year. This is due to the full implementation of the gaming ordinance and the reduction in number of AWP machines. The €9.5m reduction in revenue led to a €9.3m reduction in EBITDA Q321 versus Q320.
- With the recent heightened concerns re: Covid following the new variant, further closures can’t be ruled out.
Refinancing
- Lowen Play acknowledged that a refinancing of their Senior Secured notes failed in October 21. They continue in discussions with an Ad-hoc Committee of bondholders regarding "alternative capital structure solutions” and discussions are ongoing. In the mean time, the Super Senior RCF remains fully drawn and is expected to roll-over in December 21. Any progress on refinancing is hindered by changing regulations. Current legislation requires a minimum distance between arcades (and in some states to schools), and limits one arcade per site with maximum of 12 AWP’s per site. However, it isn’t as simple as that, as the Interstate Treaty allows Federal States to implement exemptions. This makes it extremely difficult to gauge how many AWPs and sites will be operable as the business moves into FY22.
Investment Considerations:
- We can not get comfortable on the impact of the changing regulation and reduction of AWPs will have on the business. In the absence of clarity on that, we will not be taking a position in the bonds at current levels.
- Additionally, the expansion into online gaming to compensate the business for loss of “traditional” physical AWP machines should be viewed as equity risk and bondholders shouldn’t be counting on this segment to form the basis of their recovery.
We will update our model and the Company are holding their conference call in 15th December at 1:30 UK time.
Happy to discuss.
Tomás
T: +44 20 3744 7009
M:+44 7786 705 806