Europe’s debt collectors have made a lucrative business of getting recalcitrant borrowers to cough up the money they owe. But now they face the disquiet of their own creditors.
(Bloomberg) — Europe’s debt collectors have made a lucrative business of getting recalcitrant borrowers to cough up the money they owe. But now they face the disquiet of their own creditors.
During the easy-money era of the past 10 years, debt collectors borrowed billions of euros cheaply, using the cash to buy up non-performing consumer loans at huge discounts to their face value. Then they went out and sought repayment of as much of that money as possible, yielding a fat profit.
Now the rapid rise in interest rates, combined with a squeeze on consumer spending and spiking inflation, has undermined that model, and bond investors are taking fright: Debt collectors Intrum AB and Lowell Group Ltd. have seen some of their bonds drop to distressed levels. Rising rates mean that the firms face expensive refinancing costs on the billions of euros in high-yield bonds that they have coming due.
The bind the companies find themselves in is yet another example of how even experienced executives have been caught off guard by the sea change in the credit landscape over the past year. The surge in funding costs raises the question of whether the business will have to change direction, skeptics say. Raising financing to purchase loan portfolios just may not be possible right now, and squeezing money out of consumers is harder than ever.
“They need to keep access to funding at reasonable rates,” said Thomas Samson, a high-yield portfolio manager at Muzinich & Co. “In addition, the cost-of-living crisis is adding uncertainty on the collection rates they can achieve. So it’s a double question mark for them: funding and collection.” He declined to comment on specific companies.
Debt collectors really have no good options: They can try to seek other funding sources, eliminate or reduce dividend payments to shareholders, or limit acquisitions of new portfolios. Each of those choices creates its own problems.
“Debt collectors cannot continue to follow that business model while their debt is trading at these levels,” said Vivek Bommi, head of European fixed income at AllianceBernstein Holding LP. “They might have to commit to repaying some debt to get the leverage down, and get the bond market on side.”
Intrum, Europe’s largest debt collector, has about €5 billion ($5.5 billion) of debt outstanding, some of which comes due as early as this year. After that, the Stockholm-based company has a debt maturity every year until 2028.
Much of that debt was originally priced with a yield between 3% to 5%. But now it’s facing a very different scenario. Moody’s Investors Service in November cut Intrum’s credit rating one notch further into junk, to Ba3, citing persistent elevated leverage stemming from its debt-funded acquisition strategy before the pandemic.
On Wednesday the company sold a bond with a coupon of 11.875%. Some of its securities trade as low as 74 cents on the euro.
Intrum needs to reassure investors that it will meet its goals for reducing its leverage, Chief Financial Officer Michael Ladurner said in an interview.
“It’s not a question of solvency but we need to make progress towards and deliver on our targets,” he said. Intrum wants to focus more on helping lenders get their non-performing loans repaid rather than buying those loans from them. When they buy, they would like to do so alongside a partner, he said.
Lowell, a closely held company owned by buyout firm Permira, faces what could be a steeper refinancing hurdle. The UK company has a debt wall of €1.3 billion-equivalent in high-yield bonds maturing in 2025. One of those bonds is trading at a yield to maturity of 23.8% — about three times the level it originally priced at.
The company is well positioned this year to deliver on its guidance, a spokesperson said.
“Our strategy of sustainable growth is delivering; with reduced leverage, strong and resilient collection performance, continued diversification of funding sources, high cash generation and disciplined capital deployment at attractive returns,” said the spokesperson.
A Permira spokesperson declined to comment.
The debt woes facing debt collectors seems to be mostly a European problem. One of the biggest players in the US, Encore Capital Group Inc., has $2.7 billion of debt, but less than $100 million of it matures this year and next combined, according to data compiled by Bloomberg. The company’s debt is rated Ba1 by Moody’s Investors Service, one rung below investment grade.
The irony is that the European companies face a financing predicament at what should be a great time for debt collectors: Unlike the pandemic, when consumers were stuck at home and thus had plenty of cash to pay their debts, now people are spending freely just as the global economy looks headed for a recession.
“People are going out, airports are full and so delinquencies are rising,” said Anna Sherbakova, an analyst at Moody’s. “It’s a question of time as to when the full effect will take place.”
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