(Debtwire) Intrum focuses on renewed deleveraging but recent write-downs impact operations – bond preview

07 December 2022 | 09:42 GMT

Intrum’s focus on deleveraging has been applauded, while its servicing business has a long track record with volumes expected to pick-up nicely from 2H23. But the Sweden-based credit management group’s recent hefty write-down of portfolio valuations, cautious ratings agency actions, and share price decline mean the issuer is having to offer a decent yield pick-up versus its existing Ba3/BB/BB rated EUR 850m 3% senior unsecured 2027s to tempt investors, according to nine buysiders.

The company is Europe’s largest credit management company and covers 98% of the European non-performing loan (NPL) stock. The company derives 55% of its LTM 3Q22 revenues from Debt Servicing with 45% from its Portfolio Investments segment. Its ONE operating platform enables it to collect unpaid claims on behalf of third-party clients as well as collecting late payments on its own portfolio investments.

Intrum began holding investor meetings this week on an initially planned BB/Ba3/BB rated EUR 300m minimum (this morning upsized to EUR 400m) euro-denominated senior unsecured 5.25NC2 bond that is expected to price later today (7 December). The proceeds will be used to refinance part of its existing EUR 900m 3.125% senior unsecured 2024s. The existing 2024 notes were indicated at 93.875-mid yielding 7.2% ahead of the initial announcement on Markit as funding costs are set to climb.

The new 2028 notes are marketed with 10%-10.25% yield initial price thoughts which included a two to three point OID within this yield. The potential pricing offers an attractive yield pick-up versus its existing Ba3/BB/BB rated EUR 850m 3% senior unsecured 2027s indicated at 79-mid with an 8.5% yield-to-worst on Markit, though the 2027s have the attractions of a lower cash price.

“The existing 2027s have 21 points upside to par, and if they refinance this two years before maturity, the yield jumps up even more,” one buysider said. “The existing 2027s have more upside on price and convexity [than the new issue pricing near par].”

A second buysider noted there is a new issue yield pick-up, but the last few weeks of newsflow have not been positive. They need to pay-up given new notes could price towards par versus existing notes trading well below par and given the market backdrop a substantial yield pick-up is required, he added.

The transaction is marketed as net leverage neutral for Intrum which was 4.0x net levered at 3Q22. The company plans to delever towards 3.5x and reach the target as soon as possible. Intrum has deleveraged slowly in recent years with net leverage at 4.3x at FY18, though the company has previously used portions of excess cashflow for dividend payments and funding acquisitions.

The company has previously been acquisitive and as recently as 22 November announced the acquisition of two consumer loan servicing platforms from peer Arrow along with 50% of Arrow UK back-book [previously acquired] consumer portfolios in a GBP 157.8m (cSEK 1.997bn) deal, as reported.

Management, led by Acting President and CEO Andres Rubio and CFO Michael Ladurner, told investors that recent servicing volumes have been up across its platform and that while the current environment for collections is difficult, there is a three to six month time-lag when banks will then get more comfortable selling assets. They therefore expect volumes to meaningfully increase in 2H23 and 2024, and this can provide a boost to sales.

“The leverage target from new management is higher than that from the old management even if the latest target is still below the 4.0x current net leverage. They are still acquisitive,” the first buysider said. “Cashflow is low really as excess cashflow is put into assets and estimated remaining collections.”

The servicing business has potential, but they operate in a competitive market even if they focus more on unsecured debt, the first buysider added.

“In this space, they are the biggest and best quality with a big stream of cashflow coming from servicing contracts. They’ve done this for hundreds of years, and contracts in the space are long-term, while they are trusted,” the second buysider said. “The fundamentals are solid, and this is a good business.”

The second buysider noted however that leverage at 4.0x is too high. Management are taking the right decision to prioritise deleveraging as funding costs are increasing and historically they have had the competitive advantage with spreads widening less than peers, he added.

Intrumultuous times

The company is attempting to issue following disclosure in September that its 3Q22 revaluation process identified SEK 2.9bn–SEK 3.3bn (cEUR 266m–EUR 303m) negative adjustments with an impairment loss to reach SEK 0.5bn due to lowered collection expectations on specific investment portfolios that would negatively impact its 3Q22 P&L, as reported. Some SEK 2.3bn to SEK 2.7bn of the negative adjustments were related to the book value of specific secured portfolios, invested via joint venture arrangements. The adjustment was principally related to the Italian special purpose vehicle (SPV) which owns the portfolio that Intrum and partner investment manager CarValhad previously acquired.

Intrum then disclosed in November that CarVal announced it would sell its 37.5% exposure in the jointly managed SPV with Intrum to Norway-based private equity firm Kistefos for SEK 109m, as reported. This meant further negative adjustments of SEK 4.3bn relating to the same joint venture following CarVal’s sale of its stake to Kistefos.

“They had significant write-downs on their Italian joint venture recently. CarVal’s sale of their stake, effectively resulted in a 90% write-down of the Italian SPV based on underlying assets,” independent special situations firm Sarria said. “This is an astonishing number and clearly far too much to apply across the back-book. But a number of questions linger from that episode.”

The Sarria source added that Intrum is not required to mark its back-book to market the way most investors would. “But there are a number of ways to gauge it. In the simplest terms, you take the real estate market for instance and apply half the draw down to account for the shorter duration book, then that would still be a big drop in value,” Sarria said. “That said, Intrum won’t see nearly as much change in their cash EBITDA. They’ll report stable figures for some time. The nominal P&L and cashflow impact will be nothing compared to what the back-book has done in real terms.”

The write-downs also coincided with recent revised ratings actions. Moody’s on 16 November downgraded the company corporate family rating to Ba3 from Ba2 on persistently elevated leverage, as reported, while Fitch on 2 December revised its outlook on the BB Issuer default rating to negative from stable, as reported.

The write-down and non-cash adjustments means Intrum is expected to reduce its estimated remaining collections (future cashflows expected from portfolios) according to Fitch. The negative impact on Intrum's ERC is partly offset by ERC adjustments principally relating to 2025 and beyond (when Intrum expects the senior notes in the joint venture to be repaid and the joint venture portfolio to become cash-generative for Intrum and its co-investor) with the short- to medium-term ERC largely unchanged, Fitch note.

“Any economic slowdown means there are more portfolios to buy and more NPLs to service,” the second buysider said. “But they spent money unwisely on projects such as the Italian joint venture, and they need to get back to basics and operating in core jurisdictions with unsecured portfolios.”

A third buysider countered that he doesn’t like debt purchaser credits and does not think the sector is well positioned given we are heading into a recession.

Intrum had a cash EBITDA of SEK 13.2bn for the LTM 3Q22 period. Recent earnings growth has been relatively modest with a 5.8% compound annual growth rate over the past three years.

The issuer is 37.2% owned by Nordic Capital with 62.8% ownership by other shareholders. Intrum is listed with a SEK 16.46bn market capitalization based on a share price of SEK 135.25, though its share price has fallen around 44% year-to-date.

Debt purchasers will either sink-or-swim should Europe enter a recession, but the winners will benefit from improved supply, better pricing and the work the industry has put in to escape the attentions of short sellers, as reported.

“It is challenging to assess the relative-value. The sector is unloved, and it is hard to know where it goes,” a fourth buysider said. “There has not been so much secondary trading on recent new deals, and we preferred [French telco] Iliad and [UK gambling firm] 888. A double-digit yield on Intrum is fair.”

A fifth buysider noted that Intrum is a business they stay away from given debt purchasing is a sector they dislike.

The notes will offer a tighter yield versus peers such as UK-headquartered debt purchaser Lowell which has lower rated B2/B/B+ EUR 795m 6.75% senior secured 2025s indicated at 81-mid yielding 15.1% to worst on Markit. Lowell reported marginally lower 3.7x net leverage at 3Q22.

“Other players like Lowell are less geographically diversified, have a smaller third party business and are more levered and have a longer duration back-book,” Sarria said. “Intrum will survive. They have the large third party servicing business which is performing well.”

Sarria noted that Intrum is safe and cashflows won’t dry up, but Sarria don’t give them the same future valuation they did a year ago. “Intrum have good liquidity and professional management. The write-downs on the SPV is symptomatic for what is going on out there, but too high to be applied elsewhere,” Sarria said. “But write-down or not, the company can service debt, and if EUR 400m is placed at 8%, it will hurt, but it is fair and okay on a new issue for now.”

A sixth buysider argued that recession concerns for 2023 are becoming more tangible and explains that new issues have to come with massive concessions.

"We like debt purchasers as credit investors even if write-downs impact equity investor securities," a seventh buysider said. "The deal is expensive for Intrum, but they are tackling their debt stack which is good."

Citi, Goldman Sachs (B&D) and SEB are joint global co-ordinators on the deal. The deal is expected to price later today.

Intrum and Goldman Sachs declined to comment.

by Adam Samoon and Claude Risner07 December 2022 | 09:42 GMT