Ann: CLH ASX Release, page-38

What I wanted to cover earlier, was the underlying strategy of CCP's PDL business from my perspective, which could be flawed in part, because I have not had it reviewed by experts in the field. Bear in mind that the thinking is the same for the loan business.

CCP starts of with a target rate of return for any investment in PDLs. I do not know what it is, but let us say 20% per annum as a rate. Using its well honed and long-tested analytic skills, for any PDL that CCP considers buying, it develops a guesstimated collections cash flow for six year, or so I assume. It then works out when and what money is going to flow in, and it values that at an effective interest rate that translates to its target. Because the process is computerised, there is no point in using anything other than the daily equivalent, so if the target were 20% annualised, the daily rate would be (20%+1)^(1/365.25)-1 ≈.0005.

If one works with many PDLs covering thousands of debtors, these calculations transpire to be amazingly accurate. The law of large numbers states that an observed sample average from a large sample will be close to the true population average and that it will get closer the larger the sample. Given that CCP has superb analytics, the total variance tends to be minuscule. CCP prices PDLs that way, and collects in total what it expects.

Whatever CCP pays to acquire PDLs is all that it can amortise, so if, to be conservative, CCP over amortises fresh PDLs, when it collects on old PDLs that have been fully amortised, so there is no amortisation expense, which occasions an adjustment. As the statutory accounting does not have the concept of amortisation, what CCP reports as non-statutory information (the effective amortisation) includes the small adjustments I have mentioned. Collecting on old PDLs is more time consuming, so the collections cost is higher, but if the PDL has been fully amortised, the money collected does not carry an amortisation expense, which compensates for the higher collections expense.

The above is why if you look back over a decade, the amortisation/collections percentage is typically 47%. In times when CCP holds back from acquiring PDLs, it switches to collect on older debt, some of it fully amortised, so you will see some years at less than 47%. The recent low percentage is, IMO, because of the Covid impairment that was never reversed. In effect, CCP makes 53 cents gross profit for every dollar invested in PDLs, but this is over a number of years, so the profit per year is less.

All the foregoing is very formulaic, so at the start of a year CCP has a good idea what to expect at EOY. I have forgotten the exact number, but CCP usually collects what it paid for a PDL in fifteen months. Competitors like CLH and PNC did not follow the same conservative pattern.

CCP will occasionally vary the strategic pattern for tactical reasons. For example, in new initiatives, as we saw when it entered the US market, and when it entered the loans business. In the US CCP admitted to buying PDLs at high prices to establish its collections teams, and to build up collections skills, it probably bought PDLs that it normally would avoid.