Intrum Memo 180620
- Understand the extent to which, and why, Intrum’s debt purchasing (Portfolio Investments) and servicing (Credit Management & Strategic Markets) businesses both have substantially better cash generation than major CMS sector peers
- Understand why Intrum’s senior unsecured notes (SUNs) are highly likely to remain fully or substantially covered by the business valuation even in a severe bear case where lifetime collections on portfolios owned at Q1 20 fall short of company estimates as of Q1 20 by 25%
- Understand why Intrum’s liquidity does not break even in a severe bear case until FY 24 or in a conservative base case until FY 26 (both under the no rollover of SUNs assumption) and, in both scenarios, the considerable liquidity levers Intrum would likely have
- Understand how Intrum may be close to being entirely self-funding at investment levels at, or modestly above, its ERC replacement rate
- Understand the extent to which, and why, Intrum’s ERC modelling is likely substantially more conservative than that at Lowell or Arrow Global
- Understand key COVID-19 data points on CMS firms’ collections, ERC revaluation and other key variables – from both listed / HY bond-issuing companies as well as from our survey of large CMS firms with alternative funding structures
- Understand how our positive investment thesis on Intrum does not rely on any cash flow to Intrum from its Intesa JV, withstands severe collections shortfalls in Italy, Spain and Greece (across both Portfolio Investments and Strategic Markets segments) as well as severe collections shortfalls across the business
- Detailed financial projections including drivers and modelling explanations, including of liquidity and liquidity levers in an uncertain COVID-19 world
- DCF and In-Force & New Business valuations of Intrum and resulting EV coverage of its SUNs
- True total cost-to-collect comparison across Intrum, Cabot, Lowell and Arrow Global
- Estimated historic portfolio revaluations vs actual collections outperformance across the peer group and implications for whose ERC modelling is likely conservative (taking collections outperformance period by period) and whose extrapolates current period collections outperformance (and more) through the entire ERC curve
- Spread analysis between our estimates of firms’ in-force all-in net IRRs on portfolios owned vs cost of debt and why Intrum’s in-force all-in net IRR is substantially more likely to be realised than that of Lowell and Arrow
- Modelling of cash flow to Intrum from its Intesa JV
- Key COVID-19 data points on CMS firms’ collections, ERC revaluation and other key variables – from both listed / HY bond-issuing companies as well as from our survey of large CMS firms with alternative funding structures
- Why is Intrum substantially more viable than Lowell (regardless of capital structure considerations)?
- Just how conservative is Intrum’s ERC modelling and how aggressive’s is Lowell’s on our estimates?
- From our survey of CMS firms outside the listed / HY bond-issuing space, what were the collections shortfalls on different asset classes in March and April 2020?
- How can Intrum withstand severe disruption in its Strategic Markets countries, both across debt purchasing and servicing activity?
- What do disclosures across the CMS sector imply for the trajectory of actual : estimated collections going forward?
- How severe are our base and bear cases for Intrum in terms of lifetime collections projected on portfolios owned at Q1 20?
- Why are Intrum’s € 750m 2.75% 7/2022 SUNs close to “bullet proof” and can be used for defensive short duration exposure within the CMS sector and / or to fund other shorts in the CMS sector?
- Why selling (i.e. long risk) Intrum 5 year CDS at 9% upfront + 500bps running vs buying (i.e. short risk) Lowell 5 year CDS at 15.25% upfront + 500bps running has the potential for large gains, with Intrum likely money good and payoff from Lowell CDS likely at 100% (i.e. zero recovery) and worth taking on the orphaning risk on Lowell CDS?
- How is Intrum’s Intesa JV accounted for and how can we project future cash flow to Intrum from the JV?
- View, Variant Perception & Recommendations
- Financial Projections & Valuation – DCF; In-Force & New Business. Is Debt Covered? Liquidity
- Why Is Intrum The Most Viable Amongst Europe’s Large CMS Firms
- Intesa Partnership & JV – Where Is The Cash Emergence? Does Intrum Need It?
- COVID-19 Impact – Comparative Data Across Peers
Appendix 1 – In-Force & New Business Valuation Methodology
Appendix 2 – Steady State FCF Estimation Methodologies
Appendix 3 – All-In Net IRR Estimation Methodology
Appendix 4 – Group Structure
Appendix 5 – Historic Financials
Appendix 6 – Aktua Acquisition