This post is long, I have written it quickly off the top of my head, so it may be less thought out than it could be. The metrics I include are a cut and paste from prewritten material.
Because of AASB 9 accounting standards, the entire Australian debt-buying sector has to value PDLs at "fair value" (FV). Unlike bonds, there is no well established market for PDLs, especially once they have made it past the first buyer, and so management must concoct a FV, and therein lies the problem. The higher the value of PDLs as assets is claimed to be, the greater is the NPAT (the corollary of every debit having an equivalent-value credit). This results in temptations for managers to maximise a flawed ability to: earn bonuses; justify more remuneration, borrow money; raise capital via a bullish SP; and sell shares at an inflated price. That is why I have often posted that investors should understand managements' agenda and ethics. Accounting is an elastic art.
CCP, to its credit, applies a realistic, if not conservative, attitude to FV of PDLs. CCP keeps itself in the good books of the handful of sellers of quality debt (mainly banks), so it does not try to buy PDLs at the lowest possible price. CCP calculates via sound analytics what the income stream of a PDL is likely to be for six years, and it derives a NPV via its IRR, and that is its PDL buying price. Consequently, to start with, the PDL asset is booked in at a cost that is a reasonable FV. CCP amortises each PDL over six years in the ratio of its original cash collections analytics. It regularly reanalyses each PDL, and if there is a perceived need to change the value, that is done, and the adjustments, which are relatively small, are patent in the published accounts. Consequently, the value of PDLs, irrespective of age, are seen to pass the FV test. CCPs accounting shows PDL amortisation in the traditional way, but in a manner that reflects FV within the AASB 9 standard for FV.
The historical ratio of amortisation to collections from 2014 to 2019 is nearly 47%. Amounts below are in thousands of dollars. I calculated the % row.
Income and expenditure Purchased debt ledger collections
........ 403,794 .. 380,901 .. 355,674 .. 321,989 .. 288,186 .. 288,106 .. 250,369 .. 230,442
Less: Purchased debt ledger amortisation
....... (183,789) (173,329) (166,100) (150,887) (135,721) (136,242) (119,451) (108,439)
Interest revenue from purchased debt ledgers
........ 220,005 .. 207,572 .. 189,574 .. 171,102 .. 152,465 .. 151,864 .. 130,918 .. 122,003
Amortisation % of Collections
.......... 45.52% .. 45.50% ... 46.70% .. 46.86% ... 47.09% .. 47.29% .. 47.71% .. 47.06%
If for convenience we use 47% amortisation, that means that CCP makes a gross 53% on the PDLs it buys. Obviously, there are other expenses and the time value of money, but at the end, CCP makes a healthy NPAT contribution from PDLs. It targets a similar return for unsecured loans, which is why its loans are cheaper than competitors, and why CCP enjoys the support of a large body of better quality borrowers in the unsecured loans sector.
Why the percentage of PDL amortisations to collections has dropped recently, I cannot say for sure, but I suspect it relates to CCP holding back from purchasing PDLs for a few recent years, and collecting on older PDLs that had substantially been amortised earlier. Examining the published information may, or may not, support that view. Over time, CCP cannot amortise more than it paid, so if it has over amortised a PDL early, then it must reduce that percentage later.
The collecting problem in FY2009, and probably FY2010, was not due to the GFC, it was because the earlier management team had bought more PDLs that CCP was geared to process. CCP hence stopped buying in FY2009 (it had heaps of PDLs but little cash), and focused on enhancing its collections function, and collecting on the PDLs it had. CCP was successful in collecting on older debt, and this experience allowed CCP to tone down its PDL acquisitions in recent years when the likes of PNC were bidding the PDLs' price up using the flush of cash that borrowing and capital raising occasioned. This inclines me to think collections may not suffer much in the current crises due to debtors welching.
The staff problem during the lockdown may prevent CCP from processing new PDLs to the point where the usual percentage of the debtors are on agreed repayment plans, which once in place tend to be very sticky. CCP may hence not want to buy new PDls for a while, and at the same time, banks and major utilities are, for PR reasons, notlikely to sell charged-off debt too quickly. But, such PDLs as come to market are now less likely to be sold to PNC and CLH who are cash strapped and in diabolical trouble unrelated to Covid-19, but exacerbated by it. Because of the relatively small size of CCP's US operation, it it should be easier to find growth there (it's easier to grow 1% of the addressible source of PDLs by 30% than it is to grow 60% by 30%). CCPs loan business may well get a fillip, so that can grow, even if marketing expenses are not increased, and even toned down.
The long-term impact of Covid-19 on CCP is, in my view, over estimated by the market. Remember, CCP is a poverty stock, so it needs an element of poverty to remain in business. The market hates a dearth of news, so when CCP announces its next Covid-19 update, the market would likely respond positively, even if it contains unpleasant facts about call-centre staffing problems, because that will pass. TGA announced fairly negative news yesterday, and the SP rose 60.5%, and it is up 7.69 as at 1:00 pm today.
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