Intrum - Of Needs and Options

All,

Please find our updated analysis of Intrum Justitia here.

While by nature a slow-moving beast, Intrum has as many moving parts as it has options. The public listing allows the company to mimic any outcome of any consensual restructuring without entering an insolvency process - in Sweden or elsewhere. We consider the chances of any liability management exercise remote and think that management would sooner sell their back-book below their value estimates than restructure. This means the curve is likely to steepen, rather than flatten, even if the back-end might at first rally on the news of a portfolio sale. 

Investment Considerations:

- The structure has tightened significantly in the last days following the FED's turn to a more dovish outlook. We see little risk, but also little value in going long the '24s. The '25s already need significant asset sales of €1bn, or half of that if the company halts all purchases. We feel we can find that yield more easily elsewhere, while Intrum is not entirely a yield consideration. In the long-end, the 27s are value protected, but intrums overriding strategy will be to pay down the front-end of the curve from asset sales (and stopping purchases), which effectively layers those bonds. 

- The bond curve will be flattening with any event (major asset sales, or some voluntary exchange / restructuring). It will be steepening for as long as Intrum can only pay down the front-end.

- We have 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.

- Cash EBITDA (not our favourite measure) should be improving with disposals. So those market participants favouring this metric will like what they see.

Back-Book Sale:

- Intrum claim to be working on a large transaction to offload a significant part of their back-book. Management confirmed that the likely counterparty will be Cerberus. We are not immediately convinced that there will be a large transaction with Cerberus in the short term however. One reason is that Cerberus have traditionally focussed on Real Estate NPLs and not really on Consumer NPLs. Another is that we think it's a little early. The market is still far apart on asset valuations and while we can well imagine a smaller test-balloon transaction, we struggle to believe the first transaction will be the big €1bn offload that Intrum need to pay down the 2025s. There is also still time.

- Taking Lowell's Wolf-I as blueprint, we are expecting a sale in the 93% of BV area where the headline value is par, but where the junior tranches are subject to structuring and where the purchase price is ultimately not fully paid up. 

Manipulating Cash EBITDA Leverage:

- Some say this may not be so much Intrum’s focus as it is Lowell’s, but we still think it will feature heavily.

- Sales of Back-Book portfolios should run through the P&L as collections and therefore improve Cash EBITDA leverage. A large segment of the HY market likes this metric enough to allow these companies to refinance. However, this should work better for a series of small transactions like Lowell are pursuing it than for one large transaction that should more easily be identified as a one-off. 

- As Lowell are dropping under the 3x Cash EBITDA Leverage mark (Are much closer than Intrum), they threaten to sap the market dry of those HY investors that are attracted by this number. So if Intrum are hoping to tap this market, we could envisage a race.

Accounting Change:

- Intrum have radically changed their accounting method in Q323, which makes a continuation of our existing model very cumbersome. We have squeezed the new accounts into the old model as best we can and anticipate doing so until we can look back on at least a year's worth of quarterlies under the new format.

- The new accounting breakdown of the divisions assigns more profitability to the DP business than we had previously calculated and therefore less to the CMS business. This has impacted our overall valuation on the business, which had significantly rested on the growing servicing arm.

Here to discuss with you,

Wolfgang

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