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Europe’s largest debt collector has a problem: too much debt.
Sweden’s Intrum on Tuesday offloaded €1bn of assets into a vehicle controlled by US investor Cerberus. The company, which levered up when interest rates were low to buy non-performing loans, will get €0.7bn of cash, an equity stake in the new vehicle and a five-year contract to service the assets.
The fact that a collector’s debt-fuelled shopping for bad loans has necessitated the help of one of the world’s most notorious distressed debt shops is, admittedly, amusing. But Intrum’s struggles highlight that bad debts have not been a good investment for public markets in recent years.
Intrum shares are trading close to 15-year lows; they fell 6 per cent on Tuesday. Italy’s biggest debt collector, DoValue, is faring little better. Writedowns in its Spanish business hurt profits and pushed shares to record lows last week. Non-performing assets for both have lived up to their name, proving harder and more costly to collect than expected.
The credit cycle has not helped. Non-performing loans at European banks were at record lows last year following the long clean-up after the financial crisis. Government support to individuals and businesses during the pandemic kept economic conditions relatively benign. Fewer new bad loans led to a rise in competition for servicing contracts. Still, collections from existing assets have disappointed. Half of Italian securitised NPL portfolios rated by Morningstar were doing worse than expected last year.
Higher rates may be starting to hurt Europe’s borrowers. But they are also a problem for Intrum. The asset sale helps with a looming refinancing need, paying down total debts to about €4.5bn. But the sale of profit-generating assets leaves Intrum’s leverage ratio higher after the deal, with net debt rising from 4.4 to 4.6 times cash ebitda.
The outlook remains tough. Leverage ratios will have to be reduced from organic cash generation, notes Johan Ekblom of UBS. A target to hit 3.5 times has already been pushed back by a year, to the end of 2026. Intrum must cut costs to make up for lower-than-expected collections. Shares trading at a record low of five times forward earnings suggests the market doubts its ability to make good.
A turn in the credit cycle could mean a new flow of non-performing loans, with some signs of weakness in jobs markets and strains in unsecured lending. But for now, the outlook for Europe’s debt collectors is deteriorating faster than the continent’s credit cycle.
A soft landing is hard luck in this business.
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