Intrum - 20 Points Later - Model Update
All,
Please find our updated analysis of Intrum here.
Note: Beta testers can check Intrum on the portal here.
We got this sensationally wrong. The servicing business wasn't quite holding its promises, but with the fresh equity in the books, what could possibly go wrong? Never mind that the story unravelled already in the very same quarter as the capital raise closed; the scale and totality of the write-downs echo uncomfortable events in recent years when the debt collector stunned the market with crippling adjustments to its JVs and Spanish businesses. But the question is whether the bonds are attractive now that the bonds are down 20 points from where we entered them, and even though the shock still sits deep, the fundamental picture does not (yet) justify quite such a deep discount.
Investment Rationale
We are long and wrong 5.5% of the Intrum '29s, bought at 96.25 c/€ for just under 10% YTM.
We had not anticipated the sudden deterioration of the UK and German businesses, delivered only months after the straight faced equity raise.
On our math, FCF interest coverage should trough around 1.2x, critical, but not lethal. So the big question is if it's worth waiting to find out if it turns lethal for 20% YTM. In the mid-70s, however, the bonds are already heavily impaired, compared to the true downside if the Servicing business muddles through at these depressed levels. So we are holding on to the position until we receive a new Strategic Plan in January, most likely.
Key Insights
Intrum’s operational stabilisation has suffered a material setback. German servicing requires a full restart, resulting in a SEK 1.5bn goodwill impairment and c.SEK 650m of EBITDA contribution below our forecast. The UK business also needs simplifying under new management. The January 2026 Strategic Review has effectively unravelled on the servicing side within nine months: the division is shrinking rather than growing. (Company, Current Trading)
The Speciality markets, particularly Germany and the UK, will continue to weigh on servicing revenue in 2027. Meanwhile, the real estate-led stock portfolios in Greece and Spain continue to run off rapidly, further depressing servicing performance. Management believes the trough is near, but only the accelerated cost-saving programme (now in 17 countries, up from 7) can arrest the earnings decline. (Current Trading)
The transition from Debt Purchasing to Credit Management Services has proved more resilient than initially expected, but that resilience is now in question. The servicing business was the principal growth asset supporting the Exchange Notes as their ERC asset backing eroded through the restructuring; the latest developments undermine that proposition. (Company, Current Trading, Valuation)
Following the German and UK setbacks and reduced 2027 guidance, we have lowered our valuation by half a turn to 7x EBITDA plus JVs. The ERC book now covers only the Senior Secured creditors and New Money Notes, leaving the Exchange Notes entirely reliant on the servicing franchise for value. (Valuation)
Cash generation has deteriorated, with FCCR falling from the previously stabilised c.1.4x to c.1.2x, reflecting the German restart and weakness across the Speciality markets, including real estate in Greece and Spain. This reverses part of the improvement expected following the rights issue and RCF repayment. (Model)
Despite the SEK 7.5bn rights issue, Intrum remains highly leveraged. The German and UK revelations, emerging promptly after the equity transaction, leave the company halfway back towards its pre-restructuring financial position. The RCF must be addressed within the next nine months, putting refinancing prospects under renewed pressure. (Current Trading, Model)
We had previously moved away from expecting another restructuring or even an Amend and Extend, following the equity injection and reduction in front-end maturities. However, the bond maturity cascade from September 2027 remains too dense to repay on the current earnings trajectory. We are now relying on accelerated cost savings to restore the credit in time for summer '27 when the RCF goes current. (Model, ERC)
The rights issue therefore materially improved the maturity profile but did not finally resolve the underlying earnings and leverage challenges. The original plan to grow out of the cost base has given way to shrinking into it, with cost reductions now doing the heavy lifting while servicing performance deteriorates. Bondholders are increasingly dependent on the execution of that programme. (Company, Model, Current Trading)
Q3 26
Results were a shocker. Only a few months ago, management raised equity on promises of growth, and even though there had been signs of the servicing business not performing to plan, the announcement of the full write-off of yet another business came out of nowhere. If nothing else, this kind of surprise echoes the sudden write-downs of the Spanish and Italian businesses in the run-up to the restructuring.
The German servicing business needs a full restart, and with a SEK 1,517m full subsidiary goodwill impairment, management couldn't have said so more emphatically. The company is rebuilding the German platform and changing the infrastructure. The company "does not have the right setup in order to facilitate growth". There needs to be a "complete rebuild".
Another disappointment has been the UK, which has been rudderless for two years, while it was effectively for sale. The new MD only started this fall and is aiming to simplify the business to a more traditional NPL player.
Total CMS external income of SEK 2,743m, therefore, fell 6% YoY, all organic, a sharp worsening from the -2% organic of Q2. The Specialised-markets run-off is now compounded by Germany and a UK sales effort that has not borne fruit.
Management guided servicing expectations down. Traditional markets should continue to grow, while in the UK and Germany the comps should get easier as both markets approach their trough. Management emphasised that the crisis in Germany is deeper than in the UK, but timing seems similar. Consequently, management has dropped the "flat" guidance for the service business this year: full-year servicing income will now be below 2025. This is roughly SEK 500m of servicing EBITDA contribution below where we had it, and servicing was the important division for the Exchange Notes given the ERC book covers only the super-senior creditors.
The equity raise is now visible in the books, but the 4.5x servicing leverage ratio, down from 5.7x at year end, is only balance-sheet mechanics: the SEK 7.5bn raise and SEK 2.5bn of Brocc cash cut net debt, while servicing EBITDA itself fell 14% to SEK 787m. The Operational Excellence programme, now accelerated and live in 17 countries against the seven planned, is now key to refinancing the RCF in mid 2027 (before it turns current) at a reasonable rate.
Investing income of SEK 1,075m also fell 5% (organic -6%, -12% ex-Savoy) on the shrinking book. Collections held at 100% of active forecast, and the SEK 617m invested at a 17% IRR lifted the pace closer to replenishment for the first time in years, slowing the book's decline to SEK 23,650m. The SEK 430m gain on the final Brocc disposal flowed through Investing EBIT but is a one-off, not earnings. We are therefore not sure if the GMM for the quarter is clean and are discounting the extraordinary drop to below 2x.
Management has abandoned plans to reduce the RCF via new bond issuance in this market, but is looking to refi the RCF by next summer, before it turns current. Management does not expect this market to remain as negative for another nine months. Meanwhile, management is considering buying back bonds at a discount, but needs to manage the liquidity and is balancing the aim against recently increased activity on the investment side.
One specifically discussed parameter for any larger refinancing: The 1.5 Lien '31s have an incurrence test at 3.5x of total debt, limiting the refinancing of 2L bonds at 1.5x and preventing it altogether at current levels. According to management, the new RCF should be less than half the size of the current RCF, and bond issuance to bring it down to that level would have to be sized accordingly.
Keen to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk