ANNUAL REPORT INTRUM JUSTITIA A N N U A L R EP O R T 2 0 ...

38
Board of Directors’ report
Conversely, during a recession, the number of
business transactions and invoices falls. Payment
capacity is adversely affected and consequently
a greater percentage of the invoices
result in overdue receivables and collection
cases. The effect is that the number of new cases
decreases, while the number of cases that go to
collections increases and collection becomes
more difficult.
Acquisitions
The ability to successfully implement acquisitions
depends on Intrum Justitia’s capacity
to identify and evaluate acquisition targets
and to effectively integrate them into existing
operations. A potential acquisition may also
depend on the approval of a public authority
or other third party,
Operational risks
Risks of errors and mistakes
Problems in IT systems, mistakes by employees,
deficiencies in internal control and criminal
activity can unfortunately cause problems
that affect Intrum Justitia, the Group’s
clients or their customers. Intrum Justitia has
insurance coverage that protects the Group
as well as the Board of Directors and employees
against such risks, e.g. if claims for damages
are filed due to errors or mistakes.
Operations in different countries
There are risks associated with the international
scope of Intrum Justitia’s business. These mainly
relate to differences in laws and regulations
in the 22 countries where the Group has operations.
Different regulatory and currency issues
must be managed at the same time as Intrum
Justitia must recruit and retain personnel with
the right competence and integrity.
There are significant differences in legislation,
culture, practices and market size in the
various countries. Running a successful CMS
business across Europe requires a local presence
and understanding of local conditions. Responsibility
for managing and developing operations
must rest to a significant extent with the
Group’s regions and national subsidiaries. The
Group’s development is therefore dependent on
the knowledge, experience, integrity and commitment
of local and regional management, as
well as the senior management’s ability to oversee
and control a decentralized organization.
Risks relating to the regulatory environment
Changes in regulations
The CMS industry is regulated by various
national statutes and regulations, which may
also be affected by EU regulations and directives.
Changes in the regulatory environment
may limit Intrum Justitia’s future operations
or involve an increase in costs to comply with
regulations. Because of these risks, Intrum
Justitia is constantly monitoring the EU’s
regulatory work in order to call attention to
the potential for negative effects on European
CMS companies, and lobbies for favourable
changes in regulations.
Financial risks
See also Note 38.
Market risk
This consists of the risks relating to changes in
exchange rates and interest levels.
The results and financial position of foreign
subsidiaries are reported in each country’s
currency and translated to Swedish kronor for
inclusion in the consolidated accounts. Consequently,
fluctuations in exchange rates affect the
Group’s earnings and equity.
In each country, the investments, revenues
and the majority of operating expenses are in
the local currency. Currency fluctuations therefore
have little effect on operating earnings in
the local currency. Revenues and expenses are
matched in a natural manner, which limits
transaction exposure.
The translation exposure that arises when
the balance sheets of foreign subsidiaries are
translated to SEK affects the Group’s shareholders’
equity. The translation exposure has been
hedged since February 2009 through loans in
foreign currencies.
Interest rate risks are primarily related to
the Group’s interest-bearing net debt, which
amounted to SEK 2,193.3 M (2,069.0) at
year-end. Interest rates on loans are tied to the
market rate. Interest fixing terms are short, generally
three months, and consequently, changes
in the market rate quickly impact the Group’s
net financial items.
Financing risk
Financing risk consists of the risk of a loss or
higher than expected expense to guarantee that
the Group can fulfil its payment obligations to
third parties in the short and long term. The
Group’s central treasury department prepares
weekly liquidity forecasts in order to optimize
the balance between loans and liquid assets, so
that the net interest expense can be minimized
without necessarily risking difficulties in fulfilling
outside obligations.
The Group’s long-term financing risk is minimized
by securing committed loan facilities.
Credit risk
This consists of the risk that Intrum Justitia’s
counterparties will be unable to fulfil their
obligations to the Group. Financial assets
that could expose the Group to credit risks
consist of liquid assets, accounts receivable,
purchased debt, outlays on behalf of clients,
derivatives and guarantees.
Risks inherent in purchased debt
As part of its operations, Intrum Justitia acquires
portfolios of consumer receivables and
tries to collect them. Unlike conventional collection
operations where Intrum Justitia works
on behalf of clients in return for commissions
and fees, it assumes all of the rights and risks
associated with the receivables, The portfolios
are usually purchased at prices significantly below
their nominal value, and Intrum Justitia
retains the entire amount it collects, including
interest and fees.
To minimize the risks in this business, Intrum
Justitia exercises caution in its purchase
decisions. The focus is on small and medium-sized
portfolios with relatively low average
amounts, which helps to spread the risk.
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.
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. Intrum Justitia 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 Justitia works in
cooperation with other companies and shares
in the equity investment and profits. Such alliances
have been in place with Crédit Agricole
SA since 2002, with Goldman Sachs since
2003 and with East Capital since 2010.
Guarantees in conjunction with the screening
of charge card applications in Switzerland
As part of its service offering in Switzerland,
Intrum Justitia screens new charge card applications
on behalf of card issuers and guarantees
– for a fee – payment to the issuers of the face
value of the cardholder’s debt in the event of
nonpayment. The total value of the guaranteed
debt amounted to SEK 1,371.2 M (1,270.9),
of which receivables more than 30 days overdue
amounted to SEK 5.5 M (0.8).
Intrum Justitia manages the risk associated
with this business through strict credit limits on
new cards and by analyzing the credit ratings of
card applicants. As of year-end Intrum Justitia
had allocated a provision of SEK 15.4 M (14.0)
in its balance sheet to cover payments that may
arise under the guarantees.