Intrum - Now or Never - Positioning
All,
Please find our updated analysis of Intrum here.
These days, the real action at Intrum doesn’t so much involve its assets and what the company is doing, as it involves its creditors of course. As such the updated figures are somewhat incremental. That said, the company did manage to disappoint even our guarded expectations in both divisions, but in particular in the DP business. Depending on the behaviour of the ‘25s, we expect a deal to emerge soon.
Investment Considerations:
- Having done well in the name with an initial long/short positions in the 28s and the shares, only to rotate the long leg into the 25s in the nadir of the dip and sell the 25s yesterday, fully valued, for 81.5c/€ as well as close out the shares at €26.50 p.s. The latter hurts fundamentally as we see the equity as economically worthless even if there won't be a D/E swap, but we fear that in such a deal - if it comes - the shares would spike dramatically and we are mindful of the squeeze.
- We expect a deal to emerge in the next days and weeks as the clock is running down towards the maturity of the 24s. However, unless there is a D/E swap involved or some form of convertible bonds issued, then we doubt the new instruments will be cheap enough to avoid a second restructuring in a few year's time. So we are concerned the bonds won't trade well in the future.
Game Theory:
- The '24 bonds are about to mature and are hoping to hold out successfully. However, on their own they are not big enough to do so in court, where a cram-down would force a deal on them. Theis means they are hoping to rope in the ‘25s, who will, however, have to be more careful. For the ‘25s to hold out for a year management must be disincentivised to trigger an insolvency or file preemptively in the meantime. Preemptive filing could be hard to justify, even if the company would be forced to liquidate some more of the back book during the year. Realising these assets is Intrum’s business - never mind if the price is a little better or worse. But perhaps there are ways to “accidentally” trigger the S.S. RCF.
- Advisors have been hired all around and management have signalled openness to restructuring the balance sheet, but have so far declined to negotiate a direct D/E swap.
- Over SEK 5bn bonds are maturing in July 2024 and at the time of writing efficient timing is becoming critical. - In April '24 bondholders submitted a plan to the company, which in order to save time did not include a D/E swap. The '24s were looking to hold out a strategy for which they themselves are too small and need the '25s. For the latter to follow suit they would need a commitment from the company, but that is unlikely to come forward. The long-end naturally prefers a holistic restructuring, but it would have to go through some sort of process to enforce it on the 24s and in that process they too would need the 25s to side with them.
- Given the Swedish issuer, the process would by default have to be in Sweden, which has implemented a new restructuring framework to handle such situations, even if not yet tested to this degree. However, a process could also be triggered via the RCF (English Law) and if consensual could also be brought in the UK via a change of law in the bonds, requiring a mere simple majority and not even in all issues.
- Unless a consensual deal can be found and provided a trigger can be engineered prior to the '24s maturity, we are therefore expecting a UK plan scheme. Failing either would require the company to pay down the '24s or make a preventive filing, which for lack of any other connection except the weakest via recently acquired CapQuest would have to be in Sweden. Or at least that's what management will say.
- To issue sufficient new shares to bondholders, Management would have to approach shareholders most likely in the context of an EGM and Shareholders would want to be convinced there is no other way out. The EGM would take time to schedule and it's probably too late now.
Here to discuss with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk