UK group’s private equity owner injects £600m in equity to lure investors.
A private equity-backed debt collector has sold one of the UK’s biggest junk bonds this year, but was forced to offer an elevated interest rate to compensate investors for funding a sector that had to suspend activities during the Covid-19 crisis.
Leeds-based Lowell Group sold £1.6bn worth of junk bonds as part of a refinancing plan that included a £600m equity injection by its owner Permira. It marks one of the biggest cash injections from a private equity firm in Europe since the pandemic began.
Debt collectors buy defaulted loans for pennies on the pound and then aim to profit by tracing the borrowers themselves. The sector has been a longtime target of hedge funds, which argue that complex balance sheets mask the true costs and returns from debt recovery.
“It’s a very capital-intensive business, you’re constantly having to buy new portfolios,” said Helen Rodriguez, senior analyst at research firm CreditSights. She added that Lowell’s subsequent high debt level made it a target for short sellers. The company had a leverage ratio, of net debt to adjusted cash profits, of 4.6 times at the end of September.
Pandemic-induced lockdowns made collecting money difficult for Lowell, which suspended litigation claims and bailiff actions during the crisis. The company, which is rated B+ by Fitch, expects its ability to collect defaulted loans to bounce back, but its London-listed competitor Arrow Global wrote down the value of its estimated remaining collections in August.
“Arrow’s taken a different view, and someone has to be wrong,” said George Curtis, portfolio manager at TwentyFour Asset Management.
Lowell’s three tranches of debt are spread across euros and sterling and are set to mature in 2025 and 2026. The floating notes gave investors a 6.25 percentage point premium over the benchmark euribor rate, while the senior secured notes offered between 6.75 per cent and 7.75 per cent interest. The average yield on debt sold by European issuers with single B credit ratings is roughly 5.5 per cent, according to ICE data services.
The funds raised will be used to repay the group’s existing bonds, which are set to mature in 2022 and 2023.
Permira’s cash injection provided a vote of confidence in the company, fund managers said. “It is very rare that a sponsor is willing to put in so much more equity,” said one bond investor, adding that “any leverage concerns should be alleviated with that cash”.
Over the summer, Lowell tried to attract interest from investors for a refinancing that involved Permira writing a £400m cheque, but failed to agree terms, according to fund managers.
Lowell declined to comment.
The debt purchaser’s bonds have been on a bumpy ride this year, with the price of one maturing in 2022 tumbling to 67 pence on the pound in late March before recovering to 99 pence.
“The reason it’s been the subject of massive interest is because it has an extremely large debt load and it’s perennially burnt cash,” said one short seller who bet against Lowell’s bonds.
Source: Financial Times
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