Intrum - Sobering up - Model Update

All,

Please find our updated analysis on Intrum here.

Perhaps not enough to simply refinance in 2028, but better. So much better, in fact, that it had us recalculate the entire model to check the math. If Intrum can cut costs now, why could it not do so when it was time? On the one hand, the answer lies in the shift to apparently more profitable external servicing. But that can only explain so much. On the other hand, the same shift seems to have removed the obfuscation of its profitability reporting. Faced with increasingly unforgiving third-party revenues, Intrum seems to be sobering up. Still, now that the strategic review did not reveal another debt management round, is this already the time to turn bullish?

Investment Rationale:

- Having only recently covered our bet on a negative Strategic Review announcement, we are remaining on the sidelines again. Intrum has been cutting costs radically and has more success consolidating its expenses than it did making them pay for themselves. Nonetheless, while the '27s are cash covered now, the maturity stack setting in from 2028 still seems too dense to refinance in the market. We remain concerned that in 2028 Intrum will need at least an A&E to address its maturities.

- As a big positive, we consider the company just about able to service its future interest burden. Our projections even suggest an FCCR of 1.5x, which is more than Intrum has ever generated, especially when considering how expensive the debt now is. On the negative side, we remain concerned about the company's overall leverage, and by now lack of asset coverage, 18% and falling, will soon have to be considered unsecured. Further collateral erosion is likely and should begin to hurt the New Money Notes more than the Exchange Notes. 

- On the upside, we could come to consider the Exchange Notes YTM paper if fundamental results really do follow management's projections on the strategic review in January '26. The high coupon exchange notes could quickly appreciate 6 points to the mid 90s.

- On the downside, we see the Exchange Notes exposed (except for the '27s), if in '28 their maturities need to be renegotiated. In that case, bonds would drop at least 10 points, due to the low asset cover.

Key Insights:

- Strategically, Intrum has moved from growing out of its cost base to shrinking into it, with some early traction. Nonetheless, we see insufficient scope to refinance expensive debt from 2028. A continued pivot towards servicing before renewed DP activity will further erode asset backing for the Exchange Notes, while competitive pressures will see the savings passed on to the market (Company; Strategic Review).

- On our SOTP, the Exchange Notes create intrum at c.80% of ERC book plus 3–4x servicing EBITDA - reasonable despite asset coverage falling to ~20% and trending lower. (Sum of the Parts).

- The transition from Debt Purchasing (DP) to Credit Management Services (CMS) earnings has preserved margins better than expected. However, too large a shift toward CMS would make the firm reliant on Cerberus and peers, risking Intrum’s evolution into a low-margin execution platform in a commoditised market. That outcome hasn’t materialised yet, but caution remains warranted. Cerberus’ acquisition of Intrum's minority JV stakes raises concerns around continuity of funding. Intrum must broaden its investor base rapidly to avoid operational volatility in its collection engine (Recent Trading).

- Intrum now generates modest profitability. That said, favourable economics in this sector have historically been transient; current GMM collections of ~2.4x are just sufficient to cover interest (Model). However, beyond the very short end, the dense maturity stack may require an A&E. Accordingly, YTM is not an appropriate valuation anchor beyond the front end of the curve (Model / Sum of the Parts).

Background:

- The restructuring entailed only minimal debt relief: a 10% haircut for 10% equity—primarily benefiting CDS holders. Long-term value creation (even for shareholders) would have been better served with a more substantial write-off and equity conversion. However, the redistribution of maturities will preserve creditor alignment should another restructuring become necessary in 2028 (Restructuring).

- Declining European interest rates have reduced the discount applied to ERC vs. book value. We no longer apply significant further value adjustment (ERC).

Here to discuss this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk