Intrum - Focusing the minds

All,

Please find our updated analysis of Intrum here.

We’d continue to drag our feet on this deal. Over the summer we expect Intrum to improve its proposal at least once to get the deal done. Rising temperatures ahead of September’s long-stop date should allow Management to broker the deal (and keep their jobs too). After all, there is plenty more equity where those first 10% came from. 

Investment Rationale:

- Even though we expect the restructuring to be successful, we will remain on the side-lines. The constellation of stakeholders is such that the deal management are pursuing is too small and won't help anyone. It neither addresses Intrum's excessive leverage, nor its negative cash flow, nor does it put the shareholders back in the money, even if they can manage to retain a fundamentally unreasonable 90%.

- As and when an improved proposal is published we will revisit our stance, in particular if it reasonably removes the risk of a second restructuring. 

- For the moment we find the curve about accurately priced.

- As regards fundamentals, we were mildly encouraged by a stronger performance of the servicing business in Q2.

Thoughts on the Negotiation:

- The short end running off at par does not only hurt the long-end in the bonds, but also the equity behind them. If so far the Long-end didn't muster the courage to demand more and sufficient numbers continue to hold out, maybe the oncoming par redemptions will focus everyone's minds a bit more.

- Failure to reach a deal by 12.09.2024 could see the lock-up of the long-end fail and re-open the fronts, allowing the '25s to hold out like the '24s before them and leave the long-end even worse off. In turn, this is why an improved offer is likely.

- No deleveraging: The bond write-off of SEK 3.8bn is only some 2.5 years worth of the SEK 1.5bn rise in interest. So by the time the first instalment comes due in Sep. '27, leverage is back where it was and rising.

- The proposal to swap 10% of the bonds into 10% of the equity is not very generous. Playing with the equity issue above, we come to a fair conversion into approx. 40% of the equity - perhaps a little lower, if following the restructuring the equity is expected to rise, although that should be shared among all shareholders, current and future.

- The Rescheduling of the stubs creates a window, but interest on the bonds will eat the equity's lunch. 

- To arrive at a sustainable restructuring, we think a bigger haircut and a full take-over of the equity would be mathematically more sensible. 

- The current "mean" proposal is a result of the fact that bondholders can be pitched against each other as the company is perhaps overleveraged, but not imminently insolvent for years to come. As it is now, it will not result in a right-sizing of the balance sheet, nor will it - on our projections - allow the company to produce positive net cash flow and accrete value to the equity.

Thresholds:

- For a Swedish process, the company requires only 66.67% of the class to vote in favour, assuming the RCF agrees.

- Following the pay-down of the 24s and the October issue, the long-end should account for 68% and therefore would need near-unanimous support. 

- However, some x-holders and more recently some prominent funds in the 25s have now acceded to the proposal, which should reduce the votes required from the long end, but still leave a high hurdle. 

- If the company can reach the required threshold in the long term, we are sure to see acceptance eventually surpass the 75% threshold in the UK, which would make for a more predictable and cheaper restructuring.

Here to discuss with you,

Wolfgang