Credit Management and Purchased Debt work together

Purchased debt is an independent service line within Intrum Justitia and at the same time an integral part of the offering to clients.

Advantageous coordination
Credit Management and Purchased Debt work together and support each other. The former can be refined with information from the latter. Collection of purchased debt contributes to consistently high capacity utilization in the CMS service line.

Written-off receivables can be sold
Written-off receivables are receivables that the creditor feels lack value, e.g., accounts receivable and loans with or without security, between businesses and consumers or between different businesses.
The debtor is still obligated to pay, but the cost of getting paid is considered so high that the creditor has written off the debt. It still has an economic value, however, and can be sold to a third party that continues to try to secure payment. The price of written-off receivables varies by the type of receivable. Intrum Justitia acquires portfolios within its niche at an average of less than 10 percent of their nominal value.

Large market
The global market for non-performing receiva­bles generates billions of kronor in revenue and comprises all types of credit portfolios. The sellers are companies that grant credit as their principal service or merely as part of their overall business. Credit institutions, private and public companies and government authorities are among them. By disposing of these non-performing debts, they quickly access liquid assets and can concentrate on their core business. They also avoid the risk of not getting paid at all. Buyers of written-off receivables include industry players such as Intrum Justitia as well as financial specialists such as international in vest ment banks. About 30 percent of Intrum Justitia's debt portfolios come from its CMS clients. The remainder is bought from outside parties. In the case of large portfolio investments, Intrum Justitia usually cooperates with financial partners such as Calyon or Goldman Sachs. Intrum Justitia buys portfolios after an evaluation of when and how much of the debts in the various cases will be paid. This forecast serves as the basis of the price the Group pays for the portfolio. Intrum Justitia usually does not sell portfolios after it has purchased them.

Growing portfolio
The purchased debt market mainly consists of receivables with underlying security, such as real estate. Intrum Justitia has decided, however, to concentrate on the type of cases where it has collection experience and sophisticated analysis and valuation models, i.e., unsecured small and medium-sized consumer debts. The portfolios Intrum Justitia acquires con­sist largely of unsecured bank loans and credit card debts granted to individuals, followed by receivables originating from telecom, mail order and media companies, and municipal authorities. Purchased portfolios are distributed geo­graphically and by segment. No single country accounted for more than 13 percent of Intrum Justitia's total portfolio at year-end 2008. At year-end 2008, Intrum Justitia had 2,300 (1,748) portfolios with a book value of SEK 2,330 M. Most of the portfolios can be described as small or medium-sized, with an average amount of SEK10,000 per claim. Intrum Justitia's total portfolio is amortized quickly. Of the total book value at year-end 2008, portfolios purchased during the year accounted for more than 30 percent.

High return
In the income statement, revenue from receiva­bles is recognized as the collected amount less amortization (impairment). In recent years amortization has been around 45 percent of the collected amount. The return on purchased debt has ranged between 14.4 and 21.0 percent in the last five years. The goal of an annual return of at least 15 percent was established in 2007. In the balance sheet, the value of each portfolio is recognized as the discounted value of all anticipated future cash flows. Current cash flow forecasts are reassessed over the course of the year and updated based on, among other things, achieved collection results, agreements reached with debtors on installment plans and macroeconomic information. The net of revaluations has been positive and totaled SEK 20 M in the last two years. In the last two years Intrum Justitia's actual collections quarter by quarter have exceeded projections.

Increased activity
Intrum Justitia has a central unit responsible for purchased debt. Some work is done locally in the regions. Portfolios are purchased continuously. After a purchase, Intrum Justitia owns the receivables and manages them in the same way as its clients' receivables.
Since 2005 Intrum Justitia has increased its activity in the purchased debt area, partly because more clients want to sell their portfolios and partly because the Group has strengthened its competence in analysis and purchases of portfolios with these types of receivables. Since Intrum Justitia made the decision to expand the service line, it has invested nearly SEK 3,560 M in purchased debt. The book value of the total portfolio amounted to SEK 2,330 M at year-end 2008.

Intrum Justitia plans to continue to invest around SEK 700 M per year in small and medium-sized portfolios, in addition to possible investments in larger individual portfolios. The single largest portfolio contains non-performing bank loans from an Austrian bank, acquired in 2007, with an aggregate outstanding principal of approximately SEK 6 billion. Intrum Justitia's share of the investment amounted to SEK 332 M, which was paid in June 2008.