Intrum - ready, steady, uuhhhmmmmm

All,

Please find our updated analysis on Intrum here.

When a sector is about to take off on reports of vast volumes of supply coming to market and barriers such as moratoria ending, then we’d expect the big players to step in and at least protect their market share. The biggest player however, Intrum, reiterated today that their priority remains to deleverage the business (in Cash EBITDA terms), which does not allow for purchases much above normal. We are hearing similarly underwhelming guidances from others too. So is the opportunity really bigger than the risk?

Furlough:

- The big unknown in the equation remains the end of furlough schemes across Europe. We have heard from every debt collector that the impact from furlough is minimal, but we struggle what other reason could hold the big players back from piling into those volumes. Wasn’t it all supposed to be a volume business? Intrum’s Q3 was soft, which the company put down (perhaps rightly) to seasonal effects. But it is about now that we should be learning how much collection revenues furlough really accounted for.

Macro:

- Rising interest rates threaten the back-book, agreed. But interest rates continue to trail inflation on the way back up - very much per policy. So that positive differential between higher earnings and lower funding costs should continue to work in the debt collectors’ favour for the foreseeable future.

Moratoria:

- The moratoria that prevented foreclosure during much of the pandemic are being gradually unwound. In the UK for instance the last one remaining concerns rent payments. This should allow for increased activity again, both at banks now and in the portfolio market soon.

Quality:

- The “very meaningfully increased” volumes of new portfolios are of good quality we are told as they are not coming to market due to a prior deterioration in lending practice, but due to a global event. So perhaps we will see somewhat higher acquisition MoMs than the historical comparisons to 2010 would suggest, but their realisation could be better too.

Southern Europe:

- Intrum have said that the Spanish market has been stabilising. However the company has now made a €200m correction to its investment in its JV with Intesa. The Italian market is lagging behind. Moratoria are still in place and performance is not as expected.

- Growth by acquisition has largely been Intrum’s theme in the last years and we have been fans of it as organic growth was prohibitively expensive. But it turns out that even the accretive streak of M&A at Intrum is more expensive than anticipated.

Investment Considerations:

- The long end of the cap structure trades at 3.5% YTM. We would consider shorting the long dated bonds in case we learn of a detrimental effect from the end of furlough on related sectors. Due to its large 3PC business, Intrum would probably be one of the last debt collectors to develop material problems, but in such a case we’d expect the entire sector to trade down.

Wolfgang

E: wfelix@sarria.co.uk

T: +44 203 744 7003

www.sarria.co.uk