Intrum - Nothing
All,
Please find our updated model on Intrum here - now in run-off mode.
What should one do if the future is uncertain? The answer most management teams seem to have is “Nothing”. No decisive action can responsibly be brokered to either past or future shareholders as long as there is substantial disagreement on outlook. So we are increasingly of the view that management will raise the required cash to pay down the 2025s and even the 2026s instead of betting their necks on a hard-to-justify preventive strike. By our modelling, it is even possible that there will be equity value at the end, although we would yet have to be convinced of it. Meanwhile there should be little upside in the fundamentals, but possibly some tightening of rates.
Investment Rationale:
- We recently dipped our toes in the name with a long in the '28s at 69.5 c/€. We have simultaneously taken a 2% short position in the equity at SEK 36 as we see few value drivers in the short to medium term, but consider the long end of the bond curve value covered (now by assets, then by Servicing EV).
- We see a potential upside in the long-dated bonds if the Servicing business develops well or if management decide to call a restructuring early and offer equity. The latter would be a departure from current management strategy as evidenced only last week in the distribution of the bonds Intrum bought back. If on the downside these bonds end up holding a 4.5x EV business in 2027, then that should still - just - cover today's purchase price and have earned a coupon in between, which is why we have decided for the higher paying paper.
Run-Off:
- The concentration of the bond buy-backs on the 2025 series underlined management’s intentions to keep paying down the front end of the curve and buy time. We think the 2025s are going to get paid down at maturity and see only another €500m asset sale required between now and then. Thereafter there would have to be another to pay the 2026s. Those should be feasible levels - even if management said they did not intend to again “trade liquidity for leverage”.
- All the while the portfolio would have to be in full run-off mode to provide the remaining liquidity and after the 2026s are paid the company would have less than €1bn of portfolios remaining - or approx 50c/€ as far as the long dated bonds are concerned.
All about the Servicing Business:
- The table below is the rough outcome of some extensive modelling. If we’ve gotten it right, then in 2027 the long dateds will be about EV covered if the Servicing business is worth 4.5x as some comps today suggest. If the business is valued at 7x (It’ll be Europe’s largest etc.) then the bonds should even be refinanceable outright.
The Cerberus Transaction:
- The final consideration that Cerberus are to pay Intrum at the unspecified transaction date will be a mere SEK8.2bn out of the SEK 11.5bn BV that the portfolio registered with on Sept. 30th 2023.
- The portfolio is said to be a representative sample of Intrum's overall book, but we doubt it was randomly chosen.
- If the portfolio is representative, then over an assumed half-year closing period of the transaction Intrum should have collected approx. SEK2.3bn of the balance, leaving only a transferable portfolio of SEK 9.2bn BV.
- Price discount and profit write-off have been given. Subtracting those, we arrive at a consideration of SEK 8.36bn.
- We imagine that the remaining SEK 0.16bn difference, being equal to approx. 1.5% of portfolio BV, could represent the transaction cost.
Cost-of-Living Crisis:
- We had been right before we went wrong. The crisis is here now - with delay. Portfolio collections are at a mere 100% of static forecast and at that level Intrum make no money.
- Management gave a bleak outlook on the Q423 call. There was no indication of how long the valley is except assurances that Intrum would not drop beneath the 100%. There was, however, no backup for this and high 90s look likely from as soon as next quarter.
- Clients are very worried about their consumer books, but in contrast to the aftermath of the GFC, banks today are not incentivised to sell vast books of delinquents. So management think it may take two years for the next wave of portfolios to come out with higher IRRs. Until those feed meaningfully through the front-book, another two to three years would have to pass. So there is likely no great improvement in economics for the next five years.
- That said, performance should be a little bit helped by inflation - insofar as debtors have any income at all. In time, overdue balances will become cheaper to fulfil, relative to higher income. But we are expecting a lag.
Here to discuss with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk