Intrum AB (publ) (INTRUM) Earnings Call Transcript & Summary

Hello, and welcome to the Intrum Audiocast with Teleconference 2022. [Operator Instructions] Today, I'm pleased to present CEO, Andrés Rubio. Please go ahead with your meeting.

Thank you very much, operator, and good afternoon, and good morning, everyone. I'll be going through some points, overview of the situation from my perspective, providing as much information as I can and we can. Then I'll be handing it over to Michael Ladurner, who is also on the line, our CFO, who you all know well, who will probably cover some of the more technical aspects of what we did here. And then we will -- I'll give some final reflections, and we'll open it up for questions. So beginning with what happened last week. What happened last week was a reflection on our books of a price established via transaction between 2 independent third parties on a corresponding asset held on our balance sheet. Specifically, CarVal, our co-investor on this deal, has sold their 37.5% stake in Ithaca DAC, which is the Italian SPV, which holds 95% of the portfolio, that we, together with investors, acquired from Intesa in 2018. They sold that 37.5% stake to Kistefos for consideration of approximately EUR 10 million. We have to acknowledge this reality and reflect this objective price point in the valuation of our corresponding 62.5% stake in the same Ithica DAC SPV, which implies a write-down as was announced of SEK 3.1 billion and also applies a residual book value for our stake of around EUR 17 million and a write-down of the estimated remaining collections of SEK 5.4 billion, with a residual ERC for the investment of just under EUR 80 million. I apologize for jumping back and forth, between SEK and euros, but I just wanted to make it correspond to the announcement and the headlines. This write-down and change in ERC has the additional follow-on effect that we also have to impair the client relationship related to the servicing agreement on this specific portfolio by SEK 0.2 billion. This is fundamentally different from the write-down we announced in Q3, where we took action based on our regular internal revaluation processes, whereas here, we are reflecting objective evidence established by a closed transaction, i.e., this has been externally driven, not driven by us. We did not acquire the stake as the senior secured debt attached to the underlying portfolio is not compatible with the restrictions on our balance sheet and consolidation or acquisition would have led to an increase in our aggregate debt load, which, we are clearly hearing loud and clear from the market, is not what the market prefers us to do, and we want to remain on our deleveraging path. This also implies that we require a very competent, motivated and stable co-investor, this holding mechanism, who jointly controls the portfolio with us, and that is why we've also signed a co-investment agreement with Kistefos. We're looking forward to working with them to maximize the portfolio for all -- the value of the portfolio for all stakeholders. As it regards to the price paid, which is obviously very low versus our previous expectations, since we're not a party to the transaction, our views are merely speculation, but we can focus on certain facts. CarVal had an interest clearly in exiting after being invested for only 5 -- for nearly 5 years and with a number of years left until there's expectation of cash flow. In the current market environment, from a risk perception and price perspective is the worst one we've seen in quite some time. We obviously have taken some public write-downs on this exposure. So this investment has been highlighted in a negative fashion previously. And the cash flows to the investors are a number of years away as we own a residual interest after the senior is paid, and that weighs very heavily in what is the current risk environment. And finally, obviously, the cash returns are also subordinated to those senior notes being repaid. So from my perspective, just in summary, this is a -- this is all related to a single transaction initially completed in 2018. It was refinanced last year and is a third-party transaction that we have no choice but to reflect in our books. What we own is a long-term residual interest that will not begin paying until the senior -- this portfolio-specific debt is paid off, which this was EUR 1 billion last year. It's approximately EUR 750 million today and will begin to be paid off and begin to cash flow to us sometime in 2025 and beyond. Therefore, it does not impact our cash results next year or the year after or even for the most part in 2025. And in the meantime, we are operating in the exact same manner as before, working to maximize the portfolio collections over the long term. CarVal have been a very good partner, but they're a financial investor, not an industrial long-term investor like us, and they desire to exit given the time since entry and the 3 years until expected cash flow. The difficult market environment certainly impacted the terms of their exit, but in Kistefos, we are delighted to have a new partner to manage this investment and to maximize long-term proceeds. The last point, and perhaps one of the most important points, is that, as a result of this large initial entry to Italy, which has obviously had its challenges, we now have a thriving business in that country. Italy is 1 of our top 3 or 4 performing markets, which adds not only to the scale but also the diversification of our industrial footprint and our financial results. With that, I'll hand it over to Michael to add any points he feels fit and also to go through some of the more technical aspects of our announcement. Michael?

Thank you, Andrés. And to add to what you've just said, you've mentioned the senior notes in the securitization, and to say it very clearly, the positive price paid by Kistefos implies an expectation that those senior notes will be repaid in full, which has always been and remains our expectations as well. Now from my vantage point, the other area to cover here is the settlement of the derivative agreement, which leads to a loss of around about a SEK 1 billion and the cash out of SEK 1.1 billion or EUR 99.5 million. The settlement of this derivative is due to and driven by the following considerations. Our co-investment structure with CarVal included a cleanup obligation, which required us to buy them out at a formulaic price in the future. This agreement was struck at a different time in a different macroeconomic context and with different expectations for this portfolio. When we saw a binding bid from Kistefos at EUR 10 million that CarVal was willing to accept, this clearly highlighted the potential risks and obligations embedded in the cleanup agreement with CarVal. And as Andrés said earlier, because of the way the structure of this investment interacts with our bond covenants or balance sheet, we require a co-investor to together hold and jointly manage this exposure. Putting the size of the potential future obligation and need for an experienced, competent, motivated and stable co-investor together, it made sense for us to seek and ultimately agree a settlement of just a derivative agreement with CarVal for cash payments after around about EUR 95 million I mentioned before. And to state this very clearly, our co-investment with Kistefos does not envisage any such obligations. We have learned from this past experience. Maybe to add something else to the discussion as market participants have, in the past at times, commented that the portfolio investments that we hold through joint venture arrangements are somewhat a pace. So in this context, I would like to shed some light on our current exposures. And the information I'll give you now references the latest data available in our systems. Other than the Italian SPV we've just talked about, we currently have 9 other portfolio joint ventures in our books. The underlying portfolios are in Italy, Greece and Spain. In terms of initial investment for us, they range from around about EUR 4 million to around about EUR 23 million, with an average of EUR 13 million, so much, much smaller than the Italian SPV with underlying assets also being rather different in nature. The total initial cash investment for our stake in these 9 other portfolios was circa EUR 121 million, and we have, to date, received cash of around about EUR 38 million. The remaining ERC and book value are EUR 171 million and EUR 84 million, respectively. I can also confirm that none of the other JVs -- portfolio JVs have any cleanup obligations. In terms of all the adjustments that Andrés and I mentioned, with the exception of the settlement of the derivative agreements, they're all noncash in nature. All adjustments will be normalized in our disclosure. They will be treated as items affecting comparability and not affect adjusted or cash numbers. The settlements of SEK 1.1 billion will increase net debt. There will only be a very limited tax shield, if any, as these adjustments are largely not tax-deductible. The adjustment to the ERC does not impact the time before 2025 as we also did not expect any cash flow prior to the adjustments. As we move through time and repay the senior, we will continuously monitor the investment and potentially extend the forecast, thereby increasing ERC once we have confidence and evidence to support such an extension. But for that, the senior needs to be paid down further. Overall, even though this is clearly a negative development, I need to repeat that what we are doing here is reflecting the reality created by an arm's length transaction by unrelated parties other than Intrum on our accounts. We also hope that, over time, we will be able to realize the potential inherence in continuing to be invested in the junior and mezzanine notes of the portfolio. Andrés, anything you want to add?

No, let me just make some concluding remarks. And then we can open it up for questions. So as I said before, we continue, together with Kistefos, to focus on paying down the senior notes so that we can have more visibility and start realizing the potential that is inherent in our investment in the underlying portfolio. To be very clear, I am not changing the view on the leverage target. We hear the market loud and clear. Getting to 3.5x is a key priority, and we will get there as soon as possible in 2023. Obviously, the settlement, which negatively impacts our leverage ratio by approximately 0.1x, does not help, and we'll have to compensate for this as we move forward. As we look to reduce our leverage ratio, we'll consider all possible levers, including, for example, investment pace, which is obviously also informed by the current market environment and the required focus on optimizing risk return in the context of increased hurdle rates across the board. We'll focus on driving capital-light cash generation in our servicing business, with the current macro likely helping over time with more inflows. And with regard in anticipating a question on your part but with regard to the dividend, that is a Board decision fundamentally, but -- or in the end, but all options with pros and cons will be reviewed. To reiterate what Michael and I have said a couple of times, we are merely reflecting a transaction that's occurred elsewhere on what we have on our books, and we look forward to working with Kistefos, our co-investor going forward on maximizing the return for all the stakeholders. With that, operator, we're happy to take any questions.

[Operator Instructions] Our first question comes from Jacob Hesslevik from SEB.

A few questions from my side. So first of all, why did you actually exclude such a derivative agreement when signing this contract in the first place if we don't have it in any other SPVs, as you said?

Michael, do you want to address that?

No, happy to. Such investments and core investments, right, are always a balance between our interest and our co-investors' interest, and in that case, this clearly addressed the desire of CarVal to ultimately have a way out given presumably the life of their funds and the time they're usually invested into. But as I try to convey, we obviously learn as we move along, and we realized that on balance, the -- could burden on us from this was higher than expected. And therefore, we've not included it since, and we don't have it in any of our other co-investment agreements.

Okay. But I'm just thinking out loud here, for example, I mean I understand that you have prepared a cleanup to CarVal due to you're not buying their stake and them having to go out shopping in the market for a new investor. But didn't you say CarVal left early or earlier than expected? How is that contract still [ void then ]?

Michael?

I think, Jacob, what I would point to is effectively that CarVal had already been invested for a number of years. I think this was a derivative agreement between the 2 co-investors pertaining to the co-investment. And as part of settling out and having a fresh start, a fresh clean start with a new co-investor, we felt -- because of the reasons I listed, we felt it better to clean this up, to remove this future risk and obligation and to have a clean slate with our new co-investor, Kistefos. We're -- rather than having this tail, so to say, drag across.

Okay. Second, have you heard anything from Moody or S&P regarding their rating following this transaction?

I'll take that one, Andrés, as well, if you don't in mind. We are obviously in regular contact with them, but we have not heard anything so far.

Okay. So nothing new from them. Perfect. If we then look on the ERC, I mean, you write it down by SEK 5.4 billion. But you say underlying portfolios have not changed. So this is purely an accounting technicality, and you should then be able to over collect quite substantially going forward, right?

Well, given -- so what I was going to say is, given the extent of the write-down, which was, as we've indicated a number of times here, compelled upon us by virtue of this third-party transaction, we have written this portfolio largely down. The underlying portfolio and the servicer is working towards maximizing this over the long term. And once the senior is paid down, as we get closer to that, we'll have greater visibility on the cash flows. And I would expect, hopefully, to be able to come back to you with a more positive expectation on cash flow going forward as the senior gets paid down.

Andrés, absolutely, just to add, essentially, the trade by third parties, right, creates an objective evidence for us for the value of our corresponding stakes in our books. And that's what we write across. But obviously, we need to have a consistency between what we have as a book value and the expectations behind that book value, which are essentially also, to an extent, embedded in that price. So for the factors that Andrés has listed, the market, the fact that the seniors sit ahead us, the fact that we are subordinated, owning the residual to that senior, I think we need to move through time to have more comfort and certainty around how much of that potential that we obviously remain exposed to can be realized. And as that senior gets paid down, we will obviously continuously reassess and then hopefully have more positive news at some point in the future. But as I said, at the moment, this is obviously the potential that is there.

Okay. And then just one last question from my part. To Andrés, I mean understand that [indiscernible] part is up to the Board. But what is the most important for you personally? Is it to give out dividend, portfolio acquisition or to delever going forward?

I think our priority over the near term is to delever. And that influences both our view on dividends as well as our view on portfolio investment rate. And it also, as I said earlier, is going to lead us to focus on capital-light methods of generating cash flow, which is our core servicing business as well as other potential solutions.

All right. So I guess they will focus more on CMS than, I guess, going forward, as it's more capital-light?

Well, the servicing business produces capital without capital. So yes, it's capital-light and other things, such as when I mentioned in the third quarter that we would be potentially thinking about things like capital partnerships and other things that allow us to take advantage of our platform without using our own capital.

Our next question comes from Patrik Brattelius from ABG.

Good questions. So I don't have that many. But to my understanding then, you decided not to buy the -- this portfolio since that would increase the leverage ratio. So could you then share if you were to buy the portfolio for the corresponding value you have on the balance sheet, how would that have impacted your leverage ratio?

Michael...

Maybe I'll -- yes, I'll take this one. So there's a number of elements, right? I think the first one is that adding secured senior debts to our balance sheet is incompatible with how our balance sheet is structured at the moment. It's not allowed under our funding covenants. I think that's the first point to consider. The second one is in terms of leverage. Obviously, in an absolute amount, it would have increased the debt on our balance sheet, which is something that we do not want to do. However, if you think about it purely from a ratio perspective, on a pro forma basis, it would actually have reduced the leverage ratio given that this portfolio per se is not highly leveraged and it's paying down at a fairly rapid pace. Just to give you some numbers around that, based on the rating agency analysis done at the end of last year when it was refinanced, the portfolio was refinanced with an LTV of 60%. And the debts -- or senior debt in the portfolio was around about EUR 1 billion. And as of the latest, that is down to just below EUR 750 million. So in the space of a bit less than a year, EUR 250 million of that senior were repaid out of the collections that, that portfolio generates.

Okay. And given your clear answer on the earlier dividend question, I don't have any other questions at this moment.

Our next question comes from Ermin Keric from Carnegie.

Maybe actually going back to the financial targets and prioritizations, if I phrase it this way, do you feel that you have the full mandate to act given that -- I mean you don't have a permanent CEO and so on. Do you feel like you have the mandate that should put out a full strategy on how to either delever if you're going to grow the EBITDA or if you're going to do it by reducing the gross debt or which way to actually run the business from here?

Perfect. Thank you for the question. The short answer is yes. The more extended answer is, please remember that I've been on this Board for the better part of 3.5 years. And as I said in earlier public announcements, I took on this role with the explicit agreement between the Board and myself that I was going to actively manage the platform while I sit in this role, even before I know whether or not I'm going to be the permanent CEO. And so the short answer is yes. And the lengthy answer is absolutely, everything that I say to you has been vetted with the Board and is the direction that the company is going in.

So when can you kind of come back and give us an update? Because obviously, currently, with your financial targets, they are going in a little bit different directions, which could be hard to achieve at the same time, both the growth and deleveraging and dividends. So kind of -- when could we expect a more clear update on where you expect to be, say, by the end of next year?

So as we said in the announcement during the third quarter results, our anticipation is that we will come back with the announcement of the full year results at the end of January with a more comprehensive view on targets and on transformation as well as the direction -- the strategic direction of the company. But to be very clear, on our financial targets, which you correctly point out on growth versus leverage, et cetera, some of them are counter to one another. We are giving clear priority to deleveraging. We've heard from the market, both our fixed income investors and our equity investors that in these uncertain times, that should be a priority, and we are prioritizing getting down to 3.5 as soon as possible.

If we just think about the current operations, I mean you've been quite clear that this is reflecting an external transaction. Could you just confirm, you haven't seen really anything in actual collections of the SPV or your overall book that would have driven an internal impairment or revision of your book values?

So to be clear, our write-down during the third quarter was a result of our internal asset review process, which is regular and ongoing and led by our risk department. This was not, and we would -- this would not have happened had a third-party transaction not occurred.

Then one last question. Just when you -- when we think about the [ sales force ], could you just talk us through it a little bit because I suppose Intrum has been the party incentivized to find a good third-party, almost more than CarVal in this occasion. And from the information I can find on their website, it doesn't seem like they have any direct prior experience of this type of investments. So kind of how should we think about Kistefos and sort of in the grander scheme of things? Is this a more long-term partner for other things as well? Or is it just for this specific portfolio? And are they just coming in opportunistically? Or do they have any kind of strategy behind this?

So again, as it relates to CarVal's view on this investment or broader investments, you have to ask CarVal that question. We facilitated, as Michael indicated earlier, this transaction. Obviously, whomever was going to step into CarVal's shoes needed to sign an investor agreement with us, and we have done so with Kistefos. The intention of that investor agreement is to manage this for the long term to maximize value in the residual, which we both hope to receive significant amount of. And Kistefos will be our partner in this and potentially future things but, for now, this important transaction.

And just actually one last thing more on a very positive note. Given that you say that this is possibly the worst market conditions to be selling this asset in, could we also read into that you're seeing returns continuing upwards on -- sort of the bread-and-butter normal NPLs that you're typically acquiring as well in your PI business?

Yes. And as we announced in the third quarter, third quarter IRRs were 15%. First and second quarter this year were approximately 12%. We are, on an ongoing basis, not only increasing our own hurdle rates but seeing the market adapt to higher required returns. We are seeing that. I can confirm that.

Our next question comes from Wolfgang Felix from Sarria.

Yes. I think most of my questions have been answered. But I haven't really spent much time on the SPV structure in the past. You're not fully consolidating, as you say. So I'm just trying to understand -- maybe I've got in front of me the slide from the last presentation, Page 18, how to think of the total value in the SPV or even the total SEK in the outstanding ERC in the SPV. It seems you've almost fully written down your stake in it. But in terms of, let's say, total write-down by CarVal as it's implied for the assets inside the SPV, what does that amount to? Should I just be -- should I now assume that there's effectively 1 billion of value still in that SPV? Fully sell a good [indiscernible].

So Michael?

Yes, I'm happy to take that. I think maybe a slightly different way of looking at it is essentially what we have invested into and what we have in our balance sheet and in our ERC is a residual, right, after the senior has been repaid, so a mezzanine and junior exposure. And when you translate that to the underlying SPV, at the end of the day, you have a senior note, which based on the latest, it's just under EUR 750 million of outstanding. And against that, you have a pool of assets, which obviously from a gross book value perspective. So original claim amount or whatever you want to call it is significantly higher. And we continue to collect on that. And essentially, what we've seen here is and this is sort of upstream, not in the securitization, but in the SPV that is jointly managed and controlled by us and the co-investor a view on what that residual is, given the market conditions, given that it sits behind the senior and given that it's subordinated to the senior. So this is not a view on the asset pool per se or on the senior at all -- actually, in fact, it confirms the senior, the fact that the senior will be replaced -- but a view on the residual, which we then obviously also express in our balance sheet.

I understand. So in Q2, you had ERC, I think, effectively on your books, therefore, of 7.3 billion. That would have been effectively 8 billion within the SPV net of 750 million of senior secured.

No. The ERC that we reflect in our books is purely the future possible cash receipts from that transaction, which we downgraded in Q3 as part of our usual revaluation prices and which we have now written down further to have congruence between our book value position, which is informed by market price, and the expectations embodied therein. So essentially, what we are doing now and what we have to do is to see how much of that potential -- because we're still exposed to 62.5% of the SPV that holds 95% of the junior and the mezzanine, how much of that potential over time will realize itself. And in order to assess that with more accuracy or address that likelihood with more accuracy, I think we need to see that senior being repaid down further so we can make that assessment.

I understand. All I'm really trying to get to is to understand what's the total write-down on the underlying book as implied by CarVal's transaction?

We can only talk about how we are viewing our share in the book. So the claim per se [indiscernible] the same. So [indiscernible].

The 7.3 billion you had on the book in Q2, or 5.7 in Q3, they are your share of ERC above the senior debt in the SPV, correct?

That was our best estimate at the time of what we expected to receive as a residual for our share, right?

I understand. But does that correspond -- I haven't done the math yet, it corresponds to a, I don't know, what is it 70% write-off by CarVal based on the underlying? And I was wondering...

Again, I cannot comment on other parties and how they hold the exact stake.

But I mean -- I think 2 things. Number one, if you're trying to get to something for CarVal, you have to ask CarVal. We don't -- we're not responsible for their numbers and their disclosure on this transaction, number one. Number two, I think you're instinct and what you're asking, what you're dancing around is correct and that largely speaking, the residual interest beyond the senior debt has been written off currently, which is why earlier, I think it was correct in asking that there is future collections potential given where we are today.

So can you -- my last question then, can you once more maybe make clearer to me how the underlying assets in this SPV differ overall from what you have on your books? I mean away from the structure, fundamentally. Is there -- what are the reasons why the market should not extrapolate this across the entire industry?

Well, I mean, that last question. Again, this is a single transaction that was done in 2018 at a certain term -- on certain terms. It was then refinanced last year. And ultimately, if this third-party transaction had not occurred, what we put out in the third quarter would still hold. The only thing that's occurred in the last week is a transaction between CarVal and Kistefos, which we are required to reflect in our books. And given that they have a different time horizon and they have a different perspective and have already been in this 5 years, almost 5 years and are not the long-term industrial investor that we are, they chose to sell at this level because there's another 3 years before there's cash flow. We have the benefit of being a long-term industrial investor as well as the services portfolio, and this would not have occurred had this third-party transaction not occurred.

The next question comes from Corinne Cunningham from Autonomous.

Most of my questions have been answered as well. But can I just confirm a couple of things? Are there any circumstances under which Intrum would be obligated to repay the joint venture debt?

Michael?

So if you refer to the debt in the securitization, no. That is purely secured against the assets in the securitization.

Okay. And then I just didn't quite catch some of the figures you were giving on the residual joint ventures. I think you said there was EUR 171 million and EUR 84 million, but I didn't quite catch what those figures related to.

So what I said is that in the other 9 portfolios, so excluding the Italian 1 that we've just talked about, we invested -- our initial investment was around about EUR 121 million. We've extracted EUR 38 million of cash to date already, so cash flow back out to us, and the remaining ERC associated with these 9 portfolio joint ventures is EUR 171 million. So that's our stake that we expect. And in terms of book value, we currently have been on the books for EUR 84 million for all the 9 of them together.

Our next question comes from Rickard Strand from Nordea.

Yes. First one, just a follow-up to Michael's comment there earlier about the tax. Did I hear it correctly that there is no tax deduction at all, not even on the loss from the derivative portfolio or the derivative?

We're obviously working through the tax consequences as we speak. Our expectation is that there is not going to be a substantial tax shield based on our present analysis, and that's what we've tried to convey. But we're obviously working through it and seeing what, if any, we can recover.

Okay. And then I understand that this impairment is triggered by an external transaction, et cetera. But just backing up to the revaluation that you did on the Italian SPV in earlier this year, could you just give sort of a high-level understanding of what is the main deviation in the expected cash flow compared to when this arrangement was set up some years back?

Do you want to take that, Michael?

Yes. No, absolutely. I think very simply perks. Objectively, we've just eaten a lot more out of the tail. So we've accelerated cash flows. And I think that was really visible in our Q3 adjustment, and that's away from the impact of COVID, which was quite obvious given this is an old portfolio that's highly legalized. So it requires the legal system to be working. So from that perspective, what we did in Q3 is really following our internal best practices. And it's, as Andrés said, a review that's carried out by the risk team, which is second line, which is now part of the business and acts independently in their reviews. And I think what's happened now here and -- obviously, it's somebody else's valuation, so we're obviously guessing a little bit. But in terms of both the market and in terms of the fact that, that senior does sit ahead of us, which essentially means that for a couple of years, which we knew already, there's not going to be any cash. And that subordination of us receiving cash through the senior being repaid, I think those are really factors that now a different way that's attached to. And I think we're reflecting that, and as we move through time and as we repay the senior, we'll obviously gain much more clarity of the -- of how much of that potential that we are exposed to remains realizable.

The next question comes from [ Matha Pattaya ] from BlueBay.

Most of my questions have been answered. I'm just trying to get comfort on the sort of like risk of contagion of further ERC write-down within the rest of the group. I guess you mentioned just now that you [ easened ], you've accelerated cash flows in the Italian SPV. Sort of what comfort can you give us for the rest of the book?

Well, I mean, I think Michael will add to this, but we go through a regular process as we explained in the third quarter, reviewing all of our direct portfolios. We do not see anything similar to this in that book, but we continue to monitor it. And then as Michael just indicated, in terms of those assets that are held in joint ventures, we're talking about numbers that are much smaller than this individual transaction, where the announcement -- that this announcement is about, where we have roughly EUR 84 million of current book value, and we have expected costs of EUR 171 million, so much smaller in terms of magnitude and there is no such read across in terms of any structural elements, which would lead to anything similar to this Italian situation, and we don't see the underlying assets behaving in a way that we would anticipate any write-downs either. And that goes for the joint venture assets as well as our overall portfolio. But Michael, do you want to add anything?

No, no. You've commented obviously on the joint ventures. They're much smaller -- much, much smaller, much more dramatic. And maybe the sort of the biggest point is on our own balance sheet assets, and we said that before, we do expect our performance to come down, but we continue to see outperformance. And I think that that's clearly an indicator where we are at and where we are heading.

I mean I would remind you all to the third quarter announcement and that page, which showed over the last almost 20 years, we've increased dramatically our collections, annual collections over 15x, I think it was. And over that lifetime, we've averaged about 106% of original forecast. This year, in the first 2 quarters, we were at 110%. Third quarter, we dropped down to 106%, but we're still talking about numbers well above 100%, and we do expect that to be more challenging. The collectibility is going to be more challenging given the environment. But in the 2 worst moments over the last 20 years, we were only at 98% and 99%. So in that respect, I think you can gain some comfort as it relates to the collectibility on our current portfolio.

And in terms of -- and also, you're sort of implying that these 2 valuation events, i.e., the write-down in Q3 and sort of on Friday, is separate, but they're clearly connected, i.e. CarVal has exited as a result of the write-down or vice versa.

No. I would not think so at all. Q3, which really our internal process, is doing what they always do and what they should do on a, and I said, very recurring and regular schedule. I think a trade depends on a willing seller and the willing buyer, and that just came together over the last 2 or 3 weeks, essentially, as far as we can tell from the outside. So from that perspective, the 2 events are, in my mind, not connected. But Andrés, sorry, if you want to add.

No, no, no. I mean, I think you touched upon it, which is CarVal had nothing to do with the third quarter and CarVal decides what to sell and not to sell, not us.

Our next question comes from Marco Gironi from T. Rowe Price.

I have 3 questions. My first one is I just want to understand a bit more why you chose not to buy this portfolio. So you said the pro forma leverage wouldn't have hurt because it's less than 4x and that the hurdle was the -- were the covenants in the rest of your debt. So -- but covenants can be waived. And so could you be a bit more specific on where the covenant is on inability to incur security bond? And why did you chose not to go for consent process, which I'm sure would not be anything like obviously cashing out, spending whatever, paying out EUR 100 million. So that's my first question.

Mike will take the technicality first, and then I'll comment.

It's essentially putting a senior, which is more senior than our existing senior on the balance sheet, is a violation of the negative pledge covenant. And although I agree with you in theory, given the current environment and given the state of the world, the outcome of such an exercise wave would have been by no means certain. Therefore, it was profitable for us to settle it out, to have an experience and stable co-investor alongside us and to have this obligation removed going forward.

Okay. And in terms of paying it looks like all at one thing in Q4, I'm surprised that you haven't been able to negotiate with CarVal a phase-down payment that would also help you on the cash flow. I mean you guys are one of the biggest operators in the European market, multiple service [ parts ] in many markets. What's the state of the relationship with CarVal?

The relationship, CarVal has been a good partner. They have exited this, which they've been in almost 5 years. As part of the refinancing last year, and as Michael has explained, we entered into this arrangement to facilitate their exit. We don't have any other co-investments with them. But as far as I'm concerned, the relationship is still a constructive one and that we can call upon in the future again.

Did you try and phase out the payments?

As far as we're concerned, if we're going to be making this type of a payment, we prefer to take it now and not phase it out.

Okay. And last one. When -- so based on the valuation, your revaluation in the third quarter of the portfolio and, therefore, the implied value of the equity and the SPV, would the CarVal put -- or option, I should say, would that option would have been in the money basically? Would have that been a contingent liability as of the third quarter valuation or not?

I can address that. So when you go back to the numbers we put out at the time, we said that in conjunction with the contract, we had to make a value adjustment of around about 0.1 billion. So at that point in time, this went to a -- on the liability side, and it was slightly out of the money. So it was just out of the money at the end of Q3. But it was part of the press release at the time as well.

Okay. So it wasn't quite triggered. Okay.

Our next question comes from [ Marina Lou ] Chenavari Credit Managers.

A lot of my questions have been answered. I'm just trying to understand what is the difference between your terminology and theirs because you were saying something about a time line and you guys haven't -- a longer time line. And then also you really [ stressed ] on the course being shut over COVID. But wouldn't these -- I guess what I'm trying to sort of understand is that, one, with COVID, [ wouldn't that have been a ] revaluation that have -- would have happened and taken place a while ago, given that the portfolios are being tested quarterly, as I understand from other debt collectors that there is an audit opinion in every quarter? So that's one question, why wasn't that sort of reflected earlier? [ Is it more in 2022 ] end of it? And then the second thing, what would be a shorter time horizon to trigger such a revaluation of a portfolio? Is it beyond 120 -- sorry, is much shorter than 120 months? Is it half of that? I'm just trying to understand because I'm a little worried also about read across our other portfolios, especially given that this has [ happened now twice ].

So let me address the first one. Maybe we were not clear, but this has nothing to do with COVID. We made this investment in 2018. It was held in an SPV. It was refinanced and securitized last year. And we, on a regular basis, review all of our assets, including those health and joint ventures and directly held. And then in the third quarter of this year, we noticed due to discounted payoffs and other things that the long-term cash flow, the cash flow beyond 2025 was impaired. We reflected that in the announcement in the third quarter. That was our own exercise and reflected on our own books and initiated by us. Then in addition to that, as we said on this call a number of times, CarVal, because they've been in this thing since 2018, and there is another 3 years before it would cash flow, chose to exit, and we have to reflect that here. All of the factors I just mentioned are specific to this portfolio in this situation. There's no read across. There's nothing to do with COVID either. I don't believe we mentioned anything about COVID on this portfolio and shouldn't be interpreted as having any kind of applicability to other assets. But Michael, do you want to add to that or...

No. Absolutely, no. What I tried to say before is that the general points around reducing our future expectations with, as you said, us having essentially accelerated cash flows and taken out of the tail, so out of the future of this portfolio. However, what I also said is that there was obviously specific circumstances during COVID as regards to this portfolio, where given that the court system was shut that had an impact, and we reflected that at that point in time with adjustments at the end of 2020. I mean this was just for full transparency that this was not, as you say, related to COVID, but it was another factor that any adjustments related to COVID had already been done. And I think the other point you alluded to is a bit of a question, what's the difference between a fund investor and an industrial investor? Obviously, as an industrial investor, we have a held-to-maturity perspective, whereas as a fund investor and, again, not to fund investors, I'm speculating a bit, I have a more finite time horizon that depends, for example, on the lifetime work of my fund, et cetera. And that is something that then obviously comes into decisions as, for example, when to sell.

Got it. Is that something that you guys will be discussing with the terminology going forward if you want to sell other stakes? Because it would seem unfair if that was to be the case with other things because people can have all sorts of different time horizons and methodologies, et cetera. Just to make sure that this might not happen. And again, I don't know how much [ the totality ], at least the maneuvers that you have with accounting, but that would [indiscernible].

To repeat what we've already said, the joint ventures add up totally EUR 84 million in the ground and EUR 171 million of expectations across a series of transactions. So they're much more specific and thematic and much smaller scale than what we're talking about here. And to repeat what Michael said earlier, there's no such arrangement as we did have with CarVal across any of our other joint venture agreements.

Our next question comes from Louise Miles from Morgan Stanley.

Yes, just one quick question for me, actually. So I think at the third quarter results, some of the comments you made, they suggested that you were thinking about maybe retaining cash in the next 6 months and then ramping up your portfolio acquisitions in the second half of next year because I think you were kind of saying you're expecting returnable investments to be better then. Obviously, the announcement on Friday, from Kistefos' perspective, it's quite an attractive deal for them, right? So are we assuming now that the market is pricing in better ROIs on all of these portfolios? And if so, is it right to assume that maybe you won't hold off on doing more acquisitions in the next 6 months?

So first off, I don't think you can necessarily read complete across what we are investing in an asset on an unlevered basis across our portfolio and what this specific residual interest traded for. There's specific circumstances around this, which we've gone into detail on this that influenced this price, number one. Number two, and whether it's attractive for Kistefos or not, you have to ask Kistefos that. We are looking forward to working with them to maximize the portfolio. What I will say is that you're right. We indicated that we are going to be very selective on investment pace. We don't manage to an investment volume budget. We look at good deals when there are good deals, and when there aren't good deals, we will not necessarily invest. And I did say in the third quarter earnings that I believe that there's going to be a lag, there's going to be new case inflows into our servicing business, which will be throughout 2023 and continue into 2024. And with a lag, those manifest themselves in PI investment opportunities as banks get a handle on what their new flows are and how they begin to behave before they can actually put a price on whether or not to dispose on -- whether they can decide to dispose of them and then at what price they might be able to dispose of them. So I agree, generally speaking, with what you said that in the latter half of next year and into 2024, we'll see better opportunities. But already today, we're seeing selective better opportunities with IRRs at 15% plus as opposed to 12% as earlier in this year. All right. Operator, can we get the last question, please?

There appears to be no further questions. I'll return the call back to you.

Okay. Well, thank you, everyone, for getting on. And again, we remain available. Please reach out to us through the normal channels if you have additional inquiries or questions or requests. And we thank you for your time today.

Thank you.

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.