Intrum - Part 2

“…The whole thing began in fancy and dreaming; there are no rules of architecture for a castle in the clouds” (Gilbert Keith Chesterton, English writer).

The phrase taken from the book “The Everlasting Man”, although used in another context, describes accurately the Intrum’s situation, not really timely grasped by the management and understood by the investors in the equity and in the debt instruments.

I wrote about Intrum on 12th of February after the company announced at the end of January, the 1 billion transaction to sell a part of the investment portfolio to Cerberus which is acquiring the assets at? 98% of the book value (net proceeds of SEK 8.2 bn). According to the company, the deal would have given Intrum the ability to meet 2024 and 2025 liability maturities without capital market access. A dream, a fragile construction, not judged positively by investors as I’ve just said: the stock lost in 30 days more than 50% of the value, the bonds are down several figures in secondary market: the 2027 are trading around 55 cents and the 2024 and 2025 notes (sheltered by the cash transaction with Cerberus…) hammered by 15/20 figures loss. Something clearly did not convince in the communication which failed to provide comfort, guarantees, revenues and cash flows visibility about past key performance and leverage metrics, and about future ability to sustain a levered structure at 4.5X with servicing business as the main source of earnings. Did the problems start in January 2024? Did a failure to reach a levered target of 3,5X - promised for several years - cause this distressed situation in the industry leading provider of credit management services? Why did the credit investor webinar held on 8th of March fail to offer explanations regarding how the company wants to tackle the structural pressures on the business model due to increased funding and collection costs and the leverage ratio which seems now clearly not sustainable? Did the earnings investors call in the last week of January, clarify the strategy, the evident challenges and possible solutions for the investors?

As I have explained in my previous post, the Intrum problems started a while ago and they are not linked to the old fashioned idea of market cyclicality affecting debt collectors. I don’t believe black-box worries or unordinary times caused this amount of distress: the equity shares in January 2024, before the back book sale, were trading at 70 SEK down from 260 SEK registered in January 2022. The levers to strengthen profitability as part of a continuous improvement plan presented over and over by the company’s management did not work. The negative adjustments of 3 bn euro announced in September 2022 on the Italian portfolio acquired in 2018 from Intesa, are important but they are not the main suspect of the debacle; in my opinion there are structural issues with the company-and the way “DC sector” worked and functioned so far- that have been ignored for too long, for many months. The shifting towards a capital-light asset manager in the NPL space (growing an investment business with third party capital outside balance sheet) is arriving late and with the burden of excessive debt. Several questions remain regarding the ability of achieving a margin target of 25% by 2026, and the analysis of recent trend and performance is showing this is an ambitious goal to accomplish. The competition in the NPL market and “how acquired portfolios are behaving”, all elements that can be attached to previous management decisions, and the high interest rates in the financial markets, a well assumed and observable variable over the last three years, overshadowed the accomplishments reached in the efficiencies and the cost base in challenging times.

Another consideration: the problems of the bondholders are more acute in the cases of listed companies because the amount of scrutiny is higher and the capital base is influenced by stock’s market volatility. Intrum equity was around 300SEK in Q2 2021 while the unsecured debt three years ago was changing hands around 4,25/4,50% YTW in secondary market. Patrick Drahi in Altice understood this dangerous link at the beginning of 2021, when he delisted the company from the Euronext Amsterdam exchange. I invite the investors in Intrum to look how equity and bonds traded historically and what was their past correlation ratio. The problems did not arrive overnight.

The merger of Lindorff and Intrum Justitia at the end of 2016 which set up a company that for scale and diversification was ideally positioned to capture the strong market growth in the credit management business, risks becoming in the Q1 2024 a dangerous investment place for investors (or an opportunity if you take the opposite view).

What is the main point today? I think Intrum is arriving late in appointing advisors for assisting in “evaluating alternatives to strengthen the financial profile through directly addressing the debt structure”. Bondholders are late too, and they are basically coordinating an answer but did not act proactively and preventively. The July 2024 bond maturity (469 mios euro) is close and we have already appreciated in Adler case, how tackling a complex net debt structure of 57 bn SEK in 3 months could be not straightforward, mainly because the different unsecured bonds need to be treated fairly in a restructuring process (in the Adler case the main point of controversy has been the pari-passu treatment that was not supposedly respected for the 2029 notes). The longest bond is the 9,25% 450 million euro maturing in March 2028, issued in December 2022 and is quoting around 58 cents today; the shortest maturities including bonds and private placements, total around 21 bn SEK. Rolling the RCF maturing in January 2026 will be part of the process of giving a more resilient financing base, but this is the easiest task because lenders are super senior and because banks tend to be supportive in those negotiations.

If the Atalian refinancing case can be taken as an example, the crucial point is to move forward the 2024 and 2025 maturities, paying a fee for the lock up, reimbursing a cash component of 30-35% of the notional, extending the reinstatement of the remaining amount to be issued in the form of a new bond with maturity 2029 with a cash and PIK component, and structuring a certain participation premium (call it incentive) to give to the investors that will vote in favor of the A&E proposal. The problem with this possible agreement is that it does not involve the long term bonds (Atalian did it, but it was easier because there were only three bonds, with two of them maturing at the same time) and the fact that Intrum, although remaining cash generative over the next months, will continue having too much debt for a sustainable capital structure that should be around 1.5X less levered (Lowell latest financials put the company at 2.7 pro forma net leverage for example). Refinancing options might include a debt haircut for all the securities but the negotiations will be intense and very difficult (with debt levels prices plummeting, it will be easier to convince investors to sit at the table and to discuss the unpleasant topic which was the leading argument in other distressed exchange offers in HY market. The management of Intrum got this suggestion from its advisors and elaborated it recently in enigmatic words). New money, if this is possible, shall need to find its difficult place in a capital stack where the borrower is still trying to find solutions for the operational turnaround in its core market, and the noteholders, who financed the business up until now, are unsecured and risk being primed.

The investors, in the Q4 results presentation, have been told that the Company has multiple levers for addressing the concerns of liquidity, maturities, and improving the collection performance. It is time to show the cards on the table because the available time is getting closer to the last hour. Tenders operations in secondary market do not mean thinking outside the box, they simply generate distrust, more questions without answers (as I wrote in the previous post) and do not help to face the cliff edge that Intrum needs to address. Intrum arrived to the point where the debt collector cannot be defined anymore a “self-help story”; the support going forward, must come “from outside” and we will observe with curiosity in which form this will take place.