News: CCP Credit Corp Group Looks To Raise Up To A$150 Mln, page-12

I wrote yesterday that I would look into this in the evening, but I was tired, and did not, and I have not studied the Announcements yet.

The capital-raising (CR) decision has been made, so that is spilled milk. At the end of the day the wisdom of the decision relies on the capability and integrity of management, and ASX-listed companies have a spotted record on that. Apart from the matter of capital raisings past and present (a subject in its own right) I give CCP's management top marks for managerial ability and integrity, but I keep looking for flaws in that viewpoint.

There have been some good posts on this thread since my last one, and in loose terms they confirm what I think. For now I'll shoot from the hip, and perhaps amend my views via further comment when I have had the time to read the recent Announcements, and reflect on the issues.

Although I personally dislike CRs, the market liked the Announcement, but sellers have been quick to dampen the opening exuberance and the SP closed up 17.04%.

As some posters have recognised, there is a spectrum of reasons for the CR that lies between desperately-needed-to-survive and bargains-will-be-too-juicy-to-ignore. Think of a farmer seeking funds in a drought – does he need the money to survive the drought, or does he want it to buy stock and land at give-away prices that deliver a healthy profit later? Fifty years ago I knew a rich farmer who loved droughts, because they allowed him to buy stock and land cheaply, and he had the reserves to keep the former alive until the drought broke, when he could sell stock at good prices (Australia's Sidney Kidman did that too a hundred or more years ago).

CCP is conservative in its accounting. It has always had a higher amortisation:collections ratio than its ASX-listed competitors for PDLs. CCP applies, I think, 20% up-front provision for doubtful debts in its lending business, so in periods of accelerated loan-book growth, CCP exaggerates the expense, and hence understates statutory NPAT (tax accounting uses actual bad debts). This conservatism may incline CCP to now generously impair the PDL carrying value, and take a statutory NPAT hit, and a hit to whatever the ATO will accept on the taxable profit. As ThorntonC wrote, there is no point of raising capital to cover impairment.

There are two reasons why impairments and provisioning may be ameliorated – namely: a) the team has not changed (in-coming managers are prone to exaggerate anything that can be blamed on the out-going managhement); and b) CCP has historically been conservative, so the balance sheet would have less crud in it than one would expect is the case with CCP's competitors.

Conservative accounting has little impact on cashflow, perhaps a small positive if it delays tax, but it may affect CCP's banking covenants, so extra cash in the kitty would obviate the need to go cap in hand to beg for waivers. Impairments (an upfront accounting hit) do not have to be immediately matched by funds from the CR, but one may need some funds to comply with banking covenants. Over time the actual increased loss of collections is real. ThorntonC mentioned words to the effect that accounting treatment of assets is not a reason to raise capital, but the money raised needs to go somewhere. Hopefully, the money will be well deployed.

On the matter of run-off, PDLs are like a tap where one can get as much water as one likes at the prevailing price. The limiting factor is funds and the collections facility. PDL carrying values can get back to normal quickly, provided one has the funds to buy PDLs. The loan book takes longer, because acquiring them is a one-at-a-time process. Lowering the dividend payout ratio could allow CCP to grow PDLs faster in future, but CCP seems disinclined to do that.

As a long-term investor, I am tolerant of black-swan events that even good management could not have foreseen. I put Covid-19 coinciding with CCP's expansion in the USA into the black-swan box. CCP trod water in the USA for few years to establish the viability of the market, and to sit out a stint when PDLs were expensive. CCP recently decided the time was ripe to expand there, which included investing in USA PDLs and opening a second call centre, and staffing it. It would be a shame to have to change plans there for the want of funds, provided the underlying business case is still solid. It is difficult for CCP to get significantly bigger in Australasia, but being a minnow in North America, it can expand its business there for many years.