March 20 -
Summary analysis -- Lowell Group Ltd. ----------------------------- 20-Mar-2012
CREDIT RATING: BB-/Stable/-- Country: United Kingdom
Primary SIC: Misc. business
Credit Rating History:
Local currency Foreign currency
20-Mar-2012 BB-/-- BB-/--
The ratings on U.K.-based Lowell Group Ltd. (Lowell) reflect Standard & Poor's Ratings Services' view of the company's concentration in the U.K. distressed debt purchase market and the operational--including regulatory--risks inherent in its activities. The ratings also take into account the increase in leverage in 2012--as measured by its debt to tangible equity--although we expect it to reduce rapidly. We consider that Lowell's profitability and cash flow generation have continued to improve over the past few years. Nevertheless, we consider this track record to be relatively short, and believe that the current build-up phase of the company's receivables portfolio constrains net cash flow generation after we deduct acquisition spend. We view Lowell's leading market position, marked revenue growth trajectory, focus on in-house recoveries--with little recourse to litigation--and continued investments in proprietary data mining capabilities as positive rating factors.
Leeds-based Lowell is the U.K.'s leading purchaser of distressed consumer debt. It had total assets of about GBP280 million at end-November 2011, and in excess of 8 million customer accounts. Along with its peers, Lowell is exposed to material credit risk as it holds highly distressed receivables. Players in the market may misjudge the quality of the receivables at the time of purchase and collect less than originally expected, leading to a mispricing risk. Changes in the economy could also affect collections. Despite the worsening economy that U.K. households face, Lowell's good track record to date gives us comfort and we consider that the company's customer data intelligence systems give it a competitive advantage. The granularity of the portfolio and sector diversification also help mitigate this risk, in our view.
We consider operational risk to be one of the main risks the company faces. This is due to the regulatory system in which the company operates, the importance that vendors attach to the reputation of the potential debt purchasers, generally higher employee turnover in the industry, and, finally, the reliance on IT systems as a central part of the company's processes. We consider that the company has an adequate control framework in place to manage this risk.
Although U.K. households have been facing a materially worse economy since 2008, collections have increased continuously during the August full-year 2008 to full-year 2011 period, supported by strong growth in the portfolio of receivables. Pretax profit (excluding noncash coupon payment on the preference shares) in full-year 2011 was broadly flat year on year, but markedly above that in previous years. At the same time, EBITDA has followed a strong growth path over the past four years, reaching about GBP85 million excluding portfolio amortization in full-year 2011, and GBP43 million on a reported basis.
Lowell's leverage at end-August 2011, measured as the ratio of gross debt to tangible equity (including preferred shares), was moderate at 1.4x. Pro forma figures based on the new financing structure indicate that the ratio will increase markedly in full-year 2012--after excluding goodwill created on ownership change in September 2011--but we expect this to decrease rapidly to closer to 3x by 2014 based on our expectation of earnings retention. Our view is also supported by the expected absence of dividend payments in the coming years to support business growth. Strong EBITDA generation results in adequate EBITDA-to-interest expenses and debt-to-EBITDA ratios.
The stable outlook on Lowell reflects our expectation that the group's underlying performance should continue to improve, and of sustained further growth in total collections.
We could lower the ratings on Lowell if net debt to tangible equity failed to decrease in the next two years closer toward 3x, or if we see evidence of a failure in its control framework, adverse changes in the regulatory environment or material worsening in collections against management's expectations.
Conversely, a lengthening of the company's financial track record, reduction in the company's leverage, or successful diversification into new segments could, over time, lead to a positive rating action, although we consider the upward potential to be limited at present.