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.