Intrum - One more (virtual) trade?

All,

Please find our unchanged analysis on Intrum here.

Even if today’s conference call had little to sink our teeth into, it may have tipped the balance again. Management just wanted to seize the narrative before going into its quiet period, but given how young the process is on their end, had of course little concrete to offer. Still, it’s been an interesting week and we feel we may have to make one more (virtual) trade in the short term.

Investment Rationale:

- We took a bit of a hit to our short position in the equity today as Andres Rubio emphasised that so far the equity is not part of the discussion and that plans so far concentrate on restructuring the debt only. We don’t think that one is likely without the other unless the offer will be very coercive. The liquidity for such a coercive effort is, however, on hand.

- The originally 2% short position in the equity at SEK 36p.s. remains comfortably in the money, but has shrunk. We continue to hold that position, but on account of difficult availability, we are not resetting that short. We otherwise would.

 - Our 4% long in the 25s has done well today after a bit of a bounce. The 25s have done a little better than the long end, although in hindsight we are not sure they should have. 

- We had traded out of the long end at 52 and into the 25s at 60 on the 15th with the idea that management’s strategy - subject of today’s call - would possibly just reschedule the 24s/25s/26s, but from the language we have heard today, that seems less likely to us now. 

- With bids for the 25s at 75c/€, we see the company almost fully valued (implies a 4.5x multiple on the Servicing business - for comparison 80c/€ imply a 5x multiple etc.). So perhaps it is time to take profit on the long leg and step back for the moment. We will discuss it tomorrow and keep you updated. 

What we heard:

- Downgrade incoming. This is not the most interesting fundamental foundation of a new valuation of Intrum, but it should be one of the next catalysts. 

- Intrum will not be looking to pay down the front end anymore. We’ve also heard the word wholistic several times when management discussed the restructuring.

- Andres Rubio thinks the company “can service the debt”. We are not sure how to compute that. But it does point to a lower haircut than might have been assumed.

- Rubio wants to “align” the balance sheet with the company’s business plan, which is to go capital-light. So the door seems open to a split into “AssetCo” and “ServiceCo”.

- Minimum cash should be between SEK1.5 and 2.0bn.

- The company is hoping to present a future asset management business that acquires a much-enlarged sum of portfolios per annum. Figures touted included volumes of 7-9bn. It sounded like this would come on top of capital market projections, which it would have to, since those projections did not include that kind of business. We find that large, but are of course looking forward to it. This would be revealed in H224, however, so we will probably have had to at least come to a standstill.

- We expect talks to commence in late April.

What we imagine:

- We think there will be a split into AssetCo and ServiceCo or ManCo. That should address the widest gamut of investors. 

- We think the AssetCo could see 120%+ financing, requiring some structuring. Equity to be held by the company or a straw man.

- Taking the Cerberus valuation, which also matched what we have in our model, those assets might be valued just shy of 90 c/€, so this is where the haircut would be parked. 

- The new ManCo should carry limited leverage and will be held by current shareholders. 

- At least that is what we think would come from Houlilhan / Milbank as first gambit.

Defence:

- Ample liquidity following the Cerberus transaction should give the company a strong negotiating hand. The agreement to roll into what would represent an effective haircut would be sweetened with a significant cash pay-down. 

- The new Instruments could nominally still add up to par - depending on AssetCo structure - allowing certain holders to agree more easily. 

- Hold-outs to a deal - if taken to the new Swedish regime - would have to control at least 1/4 of the bonds, which would be a big sum. We think bonds would in this case be one p.p. class and not split by maturity.

- Hold-outs may aim to dilute the equity with a D//E swap and leave less overhang on the AssetCo. Depending on residual leverage on the ManCo that could even be valuable. Despite shareholders having ostensibly "expressed their support” we don’t see material fresh cash injections from their end, nor does the company require those.

- The company will not require fresh cash, which removes one typical element of capturing economics in such a situation.

Here to discuss with you,

Wolfgang

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