Intrum - Can you have your cake and eat it?
All,
Please find our all-new analysis of Intrum Justitia here.
If Intrum were a ship, it would be loaded to the point where it has begun sinking slowly. At a financing cost of 12% its business is not sustainable and the company needs to refinance large bonds each year between now and 2028 - more quickly than it can run down its book - if that were the plan. We think however that the company is only slightly under water and that a limited amount of fresh equity for instance could do nicely for the brave investor putting it in. Alternatively, there are a raft of other structural solutions we expect to be available to the company. Active distressed investors could probably get a good deal from what is increasingly a forced seller. As for the bonds, they either trade close to par for the short-dated ‘24s (we agree with that) or they already half capture the the damage from likely getting layered on at least some of the assets.
Investment Considerations:
- We've missed the short despite shouting about it a year go. But despite a burning desire to get a position on at least now, we find the curve quite accurately values the set of risks and opportunities along the curve. Having to do more work on the legal restrictions in the bonds to gauge what exactly is possible outside a restructuring, we don't expect a formal process to be necessary to refinance the upcoming 2024 and 2025 maturities. But any new instruments may in one way or another layer the remaining bonds at AB.
- The company cannot go on issuing 12% paper and so we think management will have to get creative for at least some part of the structure.
Collections:
- First things first, collections are defying gravity. A year ago we were all only asking how low collections would sink in the face of the cost-of-living crisis. The answer is of course: they did not. Consumers - the drivers of this inflation are flush enough with cash to pay as usual.
- This means that operations are stable and gives a good base for a forecast of the business.
Book:
- Intrum's back-book has a duration of only 3.5 years. So the base rate moves in Europe, amounting to some 3% all in for the most part, only have a -9% effect on the book value. Delinquents are therefore far more resilient than - say - real estate. Eat that!
- However, the bankbook was already well over 100% leveraged and it’s still over-leveraged once we allocate a maximum of debt to the CMS division.
- We have changed view on the way Intrum calculate their Replenishment Rate. Intrum use a backward-looking methodology, while Lowell for instance use a forward-looking one. Backward may not sound as good, but it ends up being the more accurate and less systemically underestimating methodology. We are not adjusting the rate any longer.
Valuation and allocation:
- We think the valuation breaks - just - in the equity, not far from where it is priced now anyway. However, that does mean that a fair portion of the bonds carries in effect equity economics. The pricing of 12% confirms as much.
- In our view, the values of both divisions are quite even now, although the DP division with its asset book should still be able to carry more debt relative to the capital-light and CapEx-hungry business that is CMS.
- We think management can improve on transparency and story. So there is a chance sentiment improves with further charm offensives over the winter. Good performance would be better yet.
- We lend perhaps not full, but significant credence to a number of cost savings initiatives and growth plans management are pursuing.
Restructuring:
- We don’t expect a full formal process to be needed, but will concede that we have to do more work on the legal documentation.
- We expect however that Intrum have a good number of paths available to JV off certain sections of their book for instance so as to move leverage structurally sr. - to the detriment of course of existing holders. We are not certain that this would be a long-term solution, but come summer ’24, any solution may be good and at first, it would not have to be so large.
- We see the company under more pressure to manage its capital structure going into 2025. Even in a run-off scenario (available in the model) Intrum would not be able to liquidate the book fast enough to service its 2025 debt on time (not by some margin).
- The public listing may be cumbersome, having to ask shareholder permission publicly for any dilution and upholding reporting duties. But it can also allow for some flexibility in an amend-and-extend or D/E swap scenario. The dilution on existing shareholders by now however would be heavy.
- So we see the company moving some assets into a JV to raise the cash for paying out the short-dated bonds and perhaps part of the RCF. We see the RCF able to renew on its super sr. basis. From there we see the bonds refinanced one-by-one on a more sr. basis, or by a securitisation, layering those remaining long-dated bonds - comprehensively if it runs on for too long. All this while avoiding a formal process.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk