Intrum - Inflation warranting a short now?

All,

Please find our updated analysis of Intrum here.

As debt collectors go, Intrum is clearly one of the safer candidates. But with its size and diversification, it is a worthwhile bellwether for the sector. It also has one of the cheapest sources of funding, which makes it particularly interesting from a short perspective. Let us know if you are looking at other names in the sector.

Portfolio Investments:

- The long-expected bonanza of cheap consumer portfolios flooding the market, taking debt collectors’ books back to the post-Financial-Crisis hay days never happened. Intrum did purchase a larger volume of portfolios in Q222, but the Money Multiple (MoM) on the batch was actually lower, not higher than historically.

- The drop in Money Multiples could be a function of a migration in asset classes, but the field is so murky and asset classes are so vague, that we are unable to verify that.

- To be sure, the comfort we were expecting from a large purchase of high MoM assets did not materialise.

Back Book in Inflation:

- In high inflation environments the back-book should drop in value. However, we are not expecting any immediate write-down of the book. The discount rate used for valuing these assets is almost certainly unrelated to short-term market movements, or if it is, then only minimally so.

- The market therefore rightly discounts the bonds to reflect the rates it is expecting. However, aside from the obvious short-term effects on default rates and delinquents, the book will righten in the medium-term, when earnings catch up with inflation.

- Intrum’s book is not of particularly long duration. Lowell, by contrast, have a much longer duration book. On the one hand, that means less discounting and is positive for valuations, but on the other, it means there is less of a tail that will capture the upside of rising income.

Portfolio Market:

- While the market is in flux, we expect fewer transactions. We are not anticipating buys and sellers agreeing on a future any time soon, so books should run off.

- Books running off should allow or those Cash EBITDAs to fall more slowly than expected and in particular Money Multiples should rise as books age and the share of forward flow rises.

- Liquidity should remain available as new purchases run low again, but that should eventually bring covenants back into view.

- We do not immediately anticipate any impasses at Intrum, but perhaps it is worth revisiting Lowell again. The Anglo/German collector trades significantly wider, which calls for more nuanced timing, but it is a better, more targeted pure-play that has already had difficulty refinancing in 2020.

Profitability:

- Intrum stands out as one of the few debt collectors who are actually making money.

- We replace portfolio amortisation with our own estimate of Reinvestment Rate and normalise a few more items to conclude that following the merger with Lindorff the company has indeed turned profitable. Our analysis burdens Intrums historic cost with the same current Reinvestment Rate as today, which exacerbates the pace and delays the point at which it has turned profitable. But the constant assumption allows for a better view of Intrum’s profitability through the pandemic as otherwise, a varying Reinvestment Rate would have distorted the walk of those fundamentals.

- Intrum have dropped conversion costs significantly in recent years, but considering interest on debt that’s invested in the portfolios, bottom-line profit is almost entirely due to the service segments. We assume that these profitable segments are likely to remain steady through inflation.

Investment Considerations:

- According to the prices we are receiving, bonds yield between 5 and 8% to maturity, with quite a spread between SEK and EUR bonds.

- Still, rather than taking a short position in the cheapest name in the sector, which would allow us to hold it for a bit longer, we are inclined to look for a more targeted opportunity, even if that means we’d have to drop the size of the trade to limit the cash burn.

- High inflation is clearly not good news for debt collectors and the right short at the right time (should have been short all year, but that goes for almost every asset in sight) will make good sense - and money.

Happy to discuss,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk