With roots back to 1898, Lindorff is a European credit management service provider offering mainly debt collection and debt purchase services. Regarding the first operational segment, Lindorff acts as a third party that collects overdue debts, usually due to the banking and finance sector; it has in place over 20k debt management contracts and it is relying on its long term relationships with financial institutions.

Thus, the revenue for this division comes from the fees and commissions (around 1.6%) charged for collecting the third party debt under management (around EUR20 billion). Whereas the average duration of contracts is reportedly 3 years, the risks relating to renewals are diminished by the company’s long standing track record (going back to the 1980s) and systems integration.

Moving on to the debt purchasing business, this involves buying delinquent debt at a price substantially lower than its face value (less than 10% on average) and then passing it on to the debt collection department to attempt to recover as much of it as possible.

To put some figures into context, one can look at the Estimated Remaining Collections (ERC) for the next 180 months which refer to the cash flows projected to be generated by the purchased debt portfolio.  As of June 2015, ERC is estimated to stand at EUR1.98 billion, much higher than the carrying value of purchased debt (EUR820 million). Indeed, historically, Lindorff has reported that the value of the recovered amounts, on average, to over 2.5x the book value.

Whereas we acknowledge that such estimates can be met with some scepticism given their subjectivity, we stress that Lindorff has consistently reported actual collections which were higher than previously estimated. As such, presuming that these estimates are met, Lindorff should be able to deliver stable revenues from debt collection over the next 5 years, whereas in the longer run the company would need to continue to increase its portfolio of claims.

When considering the geographical mix, the EUR 162m acquisition of a debt collection unit from Banco Sabadell in Spain has made the country Lindorff’s second largest market after Norway (where the company is headquartered). Lindorff maintains a strong position in the mature Norwegian market but its operations have expanded to other European countries (Denmark, Finland, Germany, Italy, the Netherlands, Norway, Spain, Sweden, Estonia, Latvia, Lithuania, Russia and, more recently, Poland).

On the financial side, the company experienced a spike in leverage in 2014 after it was taken over by Nordic Capital Fund VIII (84.6%) in a transaction that was financed 2/3 via debt. Meanwhile, 2015 started off on a good tone with turnover and EBITDA improving and leverage metrics gradually edging lower.

Liquidity metrics are at low levels, which apparently leaves the company exposed to short term loans refinancing risks and payables roll over. However, I feel that given the profile of the company, such metrics are not entirely appropriate as a large proportion of the non-current assets are financial assets (purchased debt) which, if need be, can be sold to a third party to immediately raise cash.

Furthermore, I stress that whereas the free cash flow has been negative this is mainly because the company made the deliberate choice of putting the cash to work by adding to its portfolio of receivables; this is not uncommon for a financial institution. Relatedly, the amount of debt bought has varied over the economic cycle.

The company has several bonds outstanding, out of which at the current juncture I prefer the senior secured notes maturing 2021. Since this note is effectively senior to the unsecured bonds, their holders are in a less leveraged position (3.7x EBITDA).

Of  note, this note carries B2/BB- rating but the spreads and yield on offer are more akin to B-rated bonds even though in terms of leverage it sits somewhere in between Bs and BBs which would, in my opinion, leave room for further tightening. This is particularly the case given the strong track record, its established relationships, the sizable ERC which increases revenue visibility and the slow albeit ongoing recovery in the European economy. 

This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  


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