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Fitch Rates Intrum Justitia AB 'BB(EXP)'; Outlook Positive
June 12, 2017 / 10:41 AM / 4 months ago

Fitch Rates Intrum Justitia AB 'BB(EXP)'; Outlook Positive

(The following statement was released by the rating agency) LONDON, June 12 (Fitch) Fitch Ratings has assigned Intrum Justitia AB (Intrum) an expected Long-Term Issuer Default Rating (IDR) of 'BB(EXP)', an expected Short-Term IDR of 'B(EXP)' and an expected senior unsecured long-term debt rating of 'BB(EXP)'. The Rating Outlook on Intrum's expected Long-Term IDR is Positive. The expected ratings will convert to final ratings upon finalisation of the combination of Intrum with another credit management services provider/debt purchaser Lindorff Group (Lindorff), provided that this is undertaken in a manner consistent with Fitch's expectations, as outlined below. They assume remedies needed to address the European Commission (EC) Directorate-General for Competition's requirements are broadly in line with Intrum's proposals. On completion of the transaction, Intrum will acquire all outstanding shares in Lindorff in exchange for newly issued shares in Intrum. Pre-transaction Intrum shareholders will own slightly more than half of the post-transaction share capital, but Nordic Capital Fund VIII, currently the indirect majority shareholder in Lindorff, will become the largest indirect shareholder in the combined entity. KEY RATING DRIVERS IDRS AND SENIOR DEBT Intrum's expected ratings reflect the combined company's well-established and diversified franchise within the credit management/debt purchaser sector. Once the Lindorff transaction is completed, expected later this month, Intrum will in Europe be materially the largest in its sector as measured by EBITDA. More than half of its revenue will relate to servicing as opposed to purchasing activities. While Intrum's business model remains focussed on the narrow debt purchasing and collection markets, its broad-based franchise within these industries supports our assessment of Intrum's company profile, which has a positive influence on its expected ratings overall. Since the Lindorff combination was announced, the EC has informed the two parties of potential competition concerns in five Nordic/Baltic markets. Intrum has proposed to divest of Lindorff's business in Denmark, Estonia, Finland and Sweden, as well as its own in Norway. According to Intrum, this action will reduce pro-forma EBITDA (excluding the impact of portfolio amortisation, synergies and non-recurring items) by an estimated 12%-13% from its previous level of around SEK5 billion, but maintain the larger of the combining group's two pre-transaction operations in each market. Given continuing leading market share within each of the five affected countries, as well as the breadth of the group's coverage across Europe as a whole, Fitch continues to view Intrum's franchise positively for the expected ratings. The expected Long-Term IDR also takes into account Intrum's leverage (as measured by gross debt/EBITDA), which has a high influence on the expected ratings. On Fitch's calculations (pro-forma for the merger at end-2016, adding back portfolio amortisation, prior to proposed divestments) this would be elevated post transaction-closing at around 4.1x. This would equate to a quantitative benchmark score for leverage in the 'b' category range under Fitch's Global Non-Bank Financial Institutions Rating Criteria and therefore represents a constraint on Intrum's expected Long-Term IDR and senior debt ratings. Fitch expects only a marginal increase in the calculated leverage figure from the net effect of the EC-mandated divestments, as currently proposed, although sale proceeds could also be used to pay down debt. Fitch regards Intrum's risk controls (based on a three lines-of-defence model) as good, and the combined group demonstrates a track record in adequately pricing asset purchases. Asset quality is driven by the accuracy of Intrum's pricing models and strength of the company's collection activities, both of which Fitch views as being in line with industry practice for the debt purchasing segment of the wider finance company sector. While execution risk exists on the acquisition and integration of Lindorff, Fitch views it as manageable given both companies' significant M&A experience and the similarities in risk governance between the two institutions. Intrum's profitability benefits from recurring cash flows within the company's core businesses and an EBITDA margin, which remains wide after excluding portfolio amortisation as non-margin revenue. Pre-tax return on average assets will fall sharply following the merger, in part reflecting the additional interest expense burden associated with Lindorff's higher leverage, but profitability will still be a rating strength. Compared with smaller debt purchasers, profitability also has the advantage of considerable geographic and product diversification. While - similar to peers - Intrum's collection time horizon is long (up to 180 months), forecasted collections are skewed towards the first 84 months. This reflects Intrum's focus on smaller ticket unsecured receivables and improves the predictability and accuracy of its estimated remaining collections. However, revenues are concentrated by activity given strong correlation between offering debt purchasing and debt collection activities. The expected ratings also reflect Intrum's reliance on wholesale funding sources, partially offset by the diversity and generally stable nature of such sources. Intrum has signed a commitment letter with a banking consortium enabling the refinancing of Lindorff's financial debt in connection with the merger. The commitment includes both a five-year EUR3 billion bridge financing facility and a EUR1.1 billion revolving credit facility. Fitch regards the revolving credit facility as sufficient to support the merged group's near-term liquidity, while also allowing for portfolio investment opportunities. Interest coverage (EBITDA/interest expense) is adequate and in line with Intrum's expected Long-Term IDR. The Positive Outlook on the expected Long-Term IDR principally reflects Fitch's expectation that leverage will fall in the short-to-medium term post transaction, in accordance with the business plan set out by management. The expected rating assigned to Intrum's senior unsecured debt reflects Fitch's view of average recovery prospects for the debt class in the event of default. RATING SENSITIVITIES IDR AND SENIOR DEBT Assuming Intrum's expected ratings convert to final ratings, a sustained reduction of Intrum's cash flow leverage resulting in a gross debt/EBITDA ratio well within Fitch's 'bb' category quantitative benchmark range for leverage (2.5x to 3.5x), could trigger an upgrade of Intrum's Long-Term IDR and senior debt ratings, assuming other key rating drivers, notably Intrum's franchise, remain unchanged (or improve). Conversely, a delay in reducing cash flow leverage in line with current management forecasts could lead to a revision of the Rating Outlook to Stable from Positive. Indication that revenue attrition would be higher than currently expected, or an inability to realise anticipated cost synergies within the current indicated timeframe, could also lead to a revision of the Rating Outlook to Stable from Positive. While the Positive Outlook means a downgrade is not anticipated, Intrum's Long-Term IDR and senior debt ratings could be downgraded if leverage weakens or an inability to address EC disposal requirements affects Intrum's business model. Intrum's Short-Term IDR would only change if the company's Long-Term IDR is upgraded to 'BBB-' or higher or downgraded below 'B-'. Intrum's senior unsecured debt rating is primarily sensitive to changes in Intrum's Long-Term IDR. Changes in Intrum's debt structure (e.g. a materially larger revolving credit facility which ranks senior to senior unsecured debt) affecting our assessment of recovery prospects for senior unsecured debt in a default scenario could also affect the expected bond rating and result in the unsecured debt being notched below the IDR. Contact: Primary Analyst David Pierce Director +44 20 3530 1014 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Nalini Kaladeen Director +44 20 3530 1806 Committee Chairperson James Longsdon Managing Director +44 20 3530 1076 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Summary of Financial Statement Adjustments - Fitch adds amortisation of purchased debt to net revenues to arrive at gross revenues, including it in depreciation and amortisation, but our assessment of EBITDA margin as one measure of profitability nets down for the effect of portfolio amortisation. This has no impact on pre-tax income/average assets. 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