March 20, 2012 / 2:07 PM / 6 years ago

TEXT-S&P corrects Lowell Group

March 20 - (Editor's note: In the version of this article published earlier
today, the	
details of the revolving credit facility were misstated in the recovery	
analysis section. A corrected version follows.)	
 	
Overview	
     -- We are assigning a 'BB-' long-term counterparty credit rating to 	
U.K.-based finance company, Lowell Group Ltd. (Lowell, the group).	
     -- We are also assigning a 'BB' issue rating and '2' recovery rating to 	
the proposed GBP200 million senior term notes issued by Lowell's wholly owned 	
subsidiary, Lowell Group Financing PLC.	
     -- The notes have a seven-year maturity, and we understand that the group 	
will use them to repay existing senior debt and a shareholder loan and to make 	
an equity distribution. 	
     -- 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.	
	
Rating Action	
On March 20, 2012, Standard & Poor's Ratings Services assigned its 'BB-' 	
long-term counterparty credit rating to U.K.-based finance company, Lowell 	
Group Ltd. (Lowell). We also assigned a 'BB' issue rating and '2' recovery 	
rating to the proposed GBP200 million senior term notes issued by Lowell's 	
wholly owned subsidiary, Lowell Group Financing PLC. The outlook on Lowell is 	
stable.	
	
Rationale	
The ratings on Lowell reflect 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 this 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 in full-year 2011 about GBP85 million 	
excluding portfolio amortization, 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 upon 	
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.	
	
Recovery analysis	
The issue rating on the GBP200 million senior secured second-lien term notes is 	
'BB' (one notch above the counterparty credit rating on Lowell). The recovery 	
rating is '2', indicating an expectation of recovery of principal in a 70%-90% 	
range in the event of a payment default. 	
	
The notes are issued by Lowell Group Financing PLC, a wholly owned subsidiary 	
of Lowell Group Ltd., and they are guaranteed by the latter and all the 	
latter's material subsidiaries. Under the new financing structure, external 	
debt consists of the GBP200 million notes and a super senior GBP40 million 	
committed revolving credit facility (RCF). The notes will be secured by a 	
second-lien on all the shares of the parent and its existing subsidiaries and 	
substantially all of their assets. (For the complete recovery analysis, see 	
Standard & Poor's recovery report to be published shortly.)	
	
Outlook	
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 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, material 	
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.	
	
Related Criteria And Research	
     -- Rating Finance Companies, March 18, 2004	
     -- Principles of Credit Ratings, Feb. 16, 2011	
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008	
     -- Lowell Group Ltd., March 20, 2012	
	
Ratings List	
	
New Rating; CreditWatch/Outlook Action	
	
Lowell Group Ltd.	
 Counterparty Credit Rating             BB-/Stable/--      	
	
	
Lowell Group Financing PLC	
 Senior Secured	
  GBP200 million proposed issue due 2019  BB                 	
   Recovery Rating                      2                  	
	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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