INTRUM: squaring the circle

A brief note of Intrum and the updated document circulated on Thursday 20th of June on the potential refinancing transaction with the key noteholders.

I wrote about the Company in previous notes: at the beginning of February and three months ago. I described the Intrum history and how we got at this point, accelerated by the distressed behavior of the corporate debt after the announcement at the end of January, of the sale of part of the investment portfolio to Cerberus. A deal, many times described as a “tactical sale of the back book”, which failed to convince the investors and to reassure the equity. The economic explanations were and still are, not clear. The tragedy is in the numbers: the equity quoted 270 SEK in January 2022 while today it is at 33 SEK (the shares touched 15 SEK in the third week of March). Gross debt of 4.7X in March 2024 calculated on LTM PF Cash Ebitda of 12.975 Million SEK (the rating agencies disagree with this ratio, putting it higher than the management). The leverage has always been above 4X over the last 4 years except the first quarter of 2022 when it reached 3.8X. The promises of decreasing the leverage ratio below 3.5X never got fulfilled (a level which allowed to distribute dividends!!!, without adding further comments). It has been rumored how the major shareholder Nordic Capital has reduced in previous months its share interest in the company.

Intrum appeared in the market the last time in July 2023, when the company issued two years fixed and frn domestic currency bonds (maturing July 2025) at 11,9% and S+800bps. The noteholders of the other debt instruments understood in the summer of last year that something was “probably wrong” in their positions and in the mark to market of what they thought was suffering but remained controlled. Previously, seven months earlier, the company issued in the bigger public European HY market in December 2022 an unsecured bond of 450 million euro with a coupon of 9,25% and OID of 97. The transaction, with a tenor of slightly more than five years, initially aimed to raise 300 million euro, but the savvy investors (not scared by the write-down on the Italian portfolio communicated by Intrum in September) saw strong potential in the bond and the final issue size was eventually increased by 150 million. The price of this security today is around 65 cents.

The senior secured two-year term loan of 100 million euro signed with a bank in November 2023 at Euribor plus 450 bps, was the equivalent of an oxygen bottle provided to a terminally ill patient.

Despite being the undisputed European market leader in the debt collector space (2017 merger of Intrum Justitia and Lindorff), Intrum failed to realize its full potential. As I wrote, Intrum did not have the time to understand the new environment and to realize the transition to a capital light business model. Too much debt, maturities too close.

Is the new A&E plan feasible and correct (if we can use this word in finance is open for debate when on the contrary stressed situations are influenced by lender-on-lender violence)? Two assumptions: there is little time for negotiations; all the financial instruments are the same except for the RCF (1800-million-euro super senior) and the term loan described above (there is also a small bond, private placement, of 50 million euro, senior secured, maturing June 2024….smart people are always acting on the sidelines because someone allows them).

When I wrote the last note in March, suggesting a refinancing led by the short debt, the 2024 3,125% bond in euro was at 85 cents and the 2025 4,875% bond in euro at 60 cents. By including a haircut in the wide range of possibilities would not have altered the consideration the two bonds were good investments. The securities overperformed in the Q2. I struggled to include any recommendation for the other longer bonds because I was unable to understand if the business could survive in the current shape.

Today:

1. The A&E, at first analysis, looks fair and treats all the noteholders the same, except for the 2024 bond which is repaid in full (together with the term loan which is secured).
2. The “good A&E” label depends on whom you’re talking with: a cross-holder investor, a short owner of 2025 securities in SEK and/or in euro, a bond investor in the current 2026-2028 securities.
3. The RCF, very important for the refinancing and crucial for the supporting vote, has been treated very well, partially repaid and extended to 2028. (The banks who sold some blocks in the low 90’ made a mistake but they did it for a rating constraint). The RCF lenders remain naturally against new super senior debt, pari passu, without any repayment of their facility.
4. All bonds' maturities on the liability side are addressed, and the first liquidity test is moved to 2027.

The 2025 bonds are penalized but I don’t know if they will be able to oppose the plan (for % of their votes out of the total issued, and for timing issues). Another alternative transaction might appear this week proposing a solution to the short debt 2024 -2025 and the revolver but dealing with the long bonds in a second moment. The sweet pills given to the 2025s in the plan announced on the 20th of June, are probably not enough.

Who are the beneficiaries of this transaction? Clearly the RCF lenders and the investors who will contribute 400 million euro of new money. According to the new possible PF balance sheet, they are together less than 2X leveraged and senior to the rest of capital stack. The investors who bought long debt at cheap prices and provide new money for allowing the company to buyback part of it at discount are even better positioned. The long maturities bonds are the main drivers of this proposed refinancing, so their interests have been “aligned with the short maturities” in a comprehensive effort to extend all the maturities and to alleviate the cash flow drainage of repaying the total 1100 million-euro of 2025 securities. (I find anyway conceptually difficult to accept ”new priming debt” for buying at discount existing liabilities, and I am sure the 2025 noteholders think the same).

The 2024 bond will get repaid but, honestly, this outcome was almost a positive certainty.

Do we have a good deal for the company? Not really. The recovery depends on many variables, some of them under control of Intrum (cost saving initiatives for 1.5 billion SEK), while others are more difficult: take the Servicing Business achieving a margin of 25% by 2026. Arriving at this ambitious percentage will require significant momentum in the business. (the slow first quarter 2024- and Q4 of previous year- does not provide encouraging signs, at least for me).

Going forward, buying new NPL portfolios will be a complementary activity.

The Company in my opinion, remains with excessive debt in the balance sheet, even assuming a sub-par exchange ratio, and a cost of financing which is higher than before (all the reinstated debt is cash coupon, plus we add the 400 million of new senior debt, which some investors think is not necessary because there is not an imminent liquidity risk). The company will remain 1.6x more leveraged (at least) than it should be, and material risks exist in the business plan. (not to mention the performance of existing portfolios).

Personally, I would have set up a different structure, but I doubt conversations and agreements allowed the time before the impending debt maturity. The negative aspect of Intrum A&E is exactly the lack of time for addressing a situation that was not sustainable for many months and that everyone pretended to ignore until the last moment.

To conclude: summer is close and the maturity of the July bond too. Everyone is wishing to arrive at a conclusion without taking significant losses in the books. Similar to Adler (2029s vs 2024s), the real estate company, there are different interests in the issuer’s credit curve. A 10% haircut applied to financial debt between 2025 and 2028 is not satisfying all the investors, although some bonds, trading in secondary market at stressed levels, received a boost when the possible A&E proposal went public. The “extension” for the 2025 bonds investors remains hard to handle.

Intrum, the main actor, whatever thing happens, will have a tough job for securing a profitable growth and for cementing its market leading position (from Capital Market Day presentation, September 2023). If this will not happen, the investors (now, more or less, together on the finish line) risk to sit back around a table in 12 months from now. Summer 2024 cannot get ruined; Altice is waiting at the Autumnal equinox.

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