Intrum - Surprised To Be Here - Model Update - Positioning
All,
Please find our updated analysis on Intrum here.
We have been doom mongering debt collectors since long before the crisis hit, and feel quite vindicated about all that. But a 10% haircut and another 15% (of debt) rights issue later, and the company has 25% deleveraged. Moreover, interest rates and inflation are back under control, IRRs are up, and AI is set to take costs out of the residual back book. So what is not to like?
Investment Rationale:
- We are buying 7% of the Intrum '29s at 96.25 c/€ for just under 10% YTM. Not all is resolved for the debt collector, but the equity market is there to buy the bonds out of their risk and we don't foresee a tremendous amount of volatility in the foreseeable future. The financials at the moment are dressed up, but should not really fool seasoned investors. On the other hand, the remaining back book might really benefit from AI cost reduction and produce a windfall in the next years. Intrum is good at cost control and won't be missing this opportunity.
- The bonds are callable at par in July 2027, so upside is beginning to be call-constrained to 101c/€ if we assume a 7.5% yield, which still seems a while off. At 91c/€ the downside to a 12.5% yield looks equally far away. This is no longer a binary credit, and the ca. 10% yield look safe enough to us on what is now strong credit documentation (albeit on a service business where the Exchange Notes are not backed by owned ERC).
Key Insights:
- Strategically, Intrum has moved from growing out of its cost base to shrinking into it, with some success. The servicing business is broadly stable despite continued run-off in the Greek and Spanish stock portfolios, and costs remain under control. The Q2'26 SEK 7.5bn rights issue materially improves refinancing prospects, allowing management to address the New Money and portions of the front-end maturities. However, a continued pivot towards servicing over debt purchasing leaves bondholders increasingly reliant on servicing earnings rather than asset backing (Company, Model).
- On our valuation, Intrum trades broadly in line with peers at c.8x EBITDA plus JVs, modestly below DoValue's multiple. Following the rights issue, the Exchange Notes are covered c.1.3–1.4x by their own principal amount (c.75% LTV). However, the ERC book now effectively covers only the senior secured debt and New Money Notes; the Exchange Notes derive most of their value from the servicing franchise rather than portfolio assets (Valuation).
- The transition from Debt Purchasing (DP) to Credit Management Services (CMS) has proven more resilient than expected, although reported figures benefit somewhat from the consolidation of the Savoy JV. (Current Trading).
- Intrum has stabilised operationally, and cash generation is good, even if flattered by the ongoing portfolio run-off, which in turn is camouflaged by the Savoy transaction. FCCR is approximately 1.6x on a stable ERC basis and including the interest reducing effect of a SEK 7bn RCF pay down. (Model).
- Our previous expectation of a near-term A&E or second restructuring has eased entirely. The fresh equity allows repayment of the New Money facilities and the reduction of front-end maturities, leaving Intrum in a categorically stronger position than their UK rivals. The maturity profile is now materially more manageable (Model; ERC).
Why we like it:
- The pay-down of the front end of the bonds - 1.5 Lien New Money notes first, presumably - should lift the longer end of the notes.
- Cost savings since 2024 have been encouraging and continue ahead of target. AI could provide yet more cost savings, which for the service business will mean less than for the back book of the residual DP business - if only it were still bigger... Coupled with the slowly improving GMMs we are observing, Intrum appear to be on to better times.
- The bond documentation is now very strong.
The Risks:
- We know little about the residual size of such stock businesses as Greece and Spain, that could weigh on the Servicing division for some time.
- The consolidation of the Savoy business came at the right moment. Without another such distortion, the next quarter could look bleaker and share/bond prices could drop.
- The bonds are now primarily exposed to the servicing business and only 5% covered by the residual book value of the ERC (and still falling), once taking into account the RCF and other S. Sr. creditors.
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk