Value in Debt Collecting
17 November 2016 by Pierre Beniguel
The high yield market offers new borrowers an efficient way to raise funds, meaning we witness the emergence of new sub-sectors from time to time, one of which has been the debt collector sector. It has generally been under-covered, with limited investment bank analysts following it, therefore the bonds may not be as broadly held as some of the better known sectors. Issuance from the debt collector companies are becoming more commonplace however, although they are still expected to pay a premium to access the market. We commented on the debt collector sector in a previous blog (https://www.twentyfouram.com/blog/finding-value-in-high-yield), where we highlighted a bond from Garfunkel, which offered attractive value.
This week, another debt collector issuer, Lindorff, made the headlines as an acquisition target for Intrum Justitia. Lindorff was the first pan-European debt collector to issue high yield bonds in August 2014. It is owned by Nordic Capital, a private equity business, with the transaction materialising the exit strategy. As part of the transaction, Intrum Justitia will acquire Lindorff and Nordic Capital will own 47% of Intrum Justitia. Intrum Justitia is a pan-European credit management company, listed in Sweden, with a SEK21.1bn market cap and an Investment Grade rating.
The transaction appears to be accretive for both companies, leading to synergies and greater scale. For Lindorff specifically, the transaction will lead to its high coupon, fixed note being retired. The 9.5% subordinated notes rallied by up to 10 points when the transaction was announced on Monday. The multiple at which Intrum Justitia acquired Lindorff also gave comfort in terms of the valuations for debt collectors issuers; the transaction implies an EV/EBITDA multiple of 13.2x.
We expect the growth of this sector to continue, with sales of portfolios of consumer NPLs from financial institutions or corporates likely to remain a core feature of the sector. Selling portfolios to debt collectors offers financial institutions a capital efficient way to deal with unsecured consumer NPLs, while corporates that own portfolios of defaulted unsecured consumer obligations, such as mobile phone contracts or gym memberships can also extract some value by selling these portfolios. For the debt collectors, access to flexible and relatively inexpensive financing will remain key in maintaining their ability to acquire unsecured NPL portfolios. The acquisition of Lindorff by IG-rated Intrum Justitia brings scale and the ability to put in place cheaper financing.
In addition, regulation on the debt collectors is intensifying and this increased scrutiny supports the larger players, such as Garfunkel or Lindorff. Therefore, it’s likely that consolidation will continue to be a driver for the sector in coming years.
In our blog on Monday, we commented on our preference for bonds that can perform well even during a change of regime. Finding niche sectors with specific pricing dynamics also helps to provide performance even as the risk-free rate curves reprice wider. High coupon bonds from debt collectors, such as the Garfunkel 8.5% £ issue that we mentioned in our blog in January, have lower interest rate sensitivity, while the potential to benefit as the sector consolidates is a nice additional bonus.
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