Intrum defines risk as all factors which could have a negative impact on the ability of the Group to achieve its business objectives.
Intrum defines risk as all factors which could have a negative impact on the ability of the Group to achieve its business objectives. All economic activity is associated with risk. In order to manage risk in a balanced way, it must first be identified and assessed. We conduct risk management at both a Group and company level, where risks are evaluated in a systematic manner.
Intrum’s risk management covers strategic risks, operational risks, risk relating to the regulatory environment and financial risks. The following summary is by no means comprehensive, but offers examples of risk factors which are considered especially important for our future development.
The credit management sector is affected negatively by a weakened economy. However, Intrum's assessment is that, historically, it has been less affected by economic fluctuations than many other sectors. Risks associated with changes in economic conditions are managed through ongoing dialog with the each country management team and through regular checks on developments in each country.
Changes in regulations
With regard to risks associated with changes in regulations in Europe, Intrum continuously monitors Net debt the EU’s regulatory efforts to be able to indicate potentially negative effects for European credit management companies and to work for favorable regulatory changes.
Intrum’s financing and financial risks are managed within the Group in accordance with the treasury policy established by the Board of Directors. The treasury policy contains rules for managing financial activities, delegating responsibility, measuring and identifying financial risks and limiting these risks. Internal and external financial operations are concentrated to the Group’s central finance function in Stockholm, which ensures economies of scale when pricing financial transactions. Because the finance function can take advantage of temporary surpluses and deficits in the Group’s various countries of operation, the Group’s total interest expense can be reduced.
In each country, investments, revenues and most operating expenses are denominated in local currencies, and thus currency fluctuations have a relatively minor effect on operating earnings. Revenues and expenses in national currency are thereby hedged in a natural way, which limits transaction exposure. When the balance sheets of foreign subsidiaries are recalculated in SEK, a translation exposure arises that affects consolidated shareholders’ equity. This translation exposure is limited by raising loans in foreign currencies.
The Group’s long-term financing risk is limiting through long-term financing in the form of committed lines of credit. The Group’s objective is that at least 35 percent of total committed loans have a remaining maturity of at least three years and that not more than 35 percent of the total have a remaining maturity of less than 12 months.
While available, the current loan facility can be utilized by the Parent Company withdrawing amounts in various currencies, with short maturities, usually SEK, EUR or CHF and usually with a maturities of three or six months. The loan is carried primarily in foreign currency, to hedge the Group against translation exposure in relation to net assets outside Sweden. The Group’s aim is that the liquidity reserve, which consists of cash, bank balances, short-term liquid investments and the unutilized portion of committed lines of credit, amounts to at least 10 percent of the Group’s annual revenues. The Group has deposited its liquid assets with established financial institutions where the risk of loss is considered remote. Intrum Justitia’s cash and cash equivalents consist primarily of bank balances and other short-term financial assets with a remaining maturity of less than three months.
The Group’s central finance function prepares regular liquidity forecasts with the purpose of optimizing the balance between loans and liquid funds so that the net interest expense is minimized without, for that matter, incurring difficulties in meeting external commitments.
As part of its normal operations, the Group incurs outlays for court expenses, legal representation, enforcement authorities and similar – outlays that are necessary for collection to be conducted through the legal system. In certain cases, these outlays can be passed on to, and collected from debtors. In many cases Intrum Justitia has agreements with its clients whereby any expenses that cannot be collected from debtors are instead refunded by the client. The amount that is expected to be recovered from a solvent counterparty is recognized as an asset in the balance sheet on the line Other receivables.
Risks inherent in purchased debt
To minimize the risks in this business, caution is exercised in purchase decisions. The focus is on small and medium-sized portfolios with relatively low average amounts, to help spread risks. In 2011, the average nominal value per case was about SEK 7,200. Purchases are usually made from clients with whom the Group has maintained long-term relationships and therefore has a thorough understanding of the receivables in question. The acquisitions generally involve unsecured debt, which reduces the capital investment and significantly simplifies administration compared with collateralized receivables.
Purchased debt portfolios are usually purchased at prices significantly below the nominal value of the receivables, and Intrum retains the entire amount it collects, including interest and fees. Intrum Justitia places high yield requirements on purchased debt portfolios. Before every acquisition, a careful assessment is made based on a projection of future cash flows (collected amount) from the portfolio. In its calculations, Intrum Justitia is aided by its long experience in collection management and its scoring models.
Scoring entails the consumer’s payment capacity being assessed with the aid of statistical analysis. Intrum therefore believes that it has the expertise required to evaluate these types of receivables. To facilitate the purchase of larger portfolios at attractive risk levels, Intrum works in cooperation with other companies and shares in the equity investment and profits. Such alliances have been conducted with, for example, Crédit Agricole SA, Goldman Sachs and East Capital since. Risks are further diversified by acquiring receivables from clients in different sectors and different countries.
Guarantees in conjunction with the screening of charge card applications in Switzerland
Intrum manages the risk associated with this business through strict credit limits on new cards and by analyzing the credit ratings of card applicants. A provision is made in the balance sheet to cover expenses that may arise due to the guarantee.
The Group’s loan facility contains a number of operations-related and financial covenants, including limits on certain financial indicators. The Group Management Team carefully monitors these key financial indicators, so that it can quickly take measures if there is a risk that one or more limits may be exceeded.