On balance, it does not make much difference to CCP what the economy does, because PDL business is a long-term game, and what happens in one period must be balanced with other periods. If management thinks short term, the proverbial hits the fan later.
When the lumpen masses have heaps of money, they tend to pay off debts and rack up less credit card debt, so collections are good, but when credit card debt declines, charged-off debts decline, so PDL supply suffers. When the reverse happens in the economy, collections suffer a bit, but more PDLs come on to the market. The trick is to hide profit in the balance sheet by over amortising PDLs, and later when collecting on older PDLs that are substantially amortised, the collections drop down to Gross Profit at low cost.
I’d like to highlight the unique nature of our business that provides a degree of resilience from year-to-year changes in portfolio sales or in consumer behavior. We collect on portfolios over the long term, often ten years or more after purchase and potentially stretching across economic and credit cycles. While a down economic cycle may lead to some slowing in debt repayments, it also leads to increases in charge-offs and portfolio sales. Alternatively, when the economy improves, many consumers look to resolve their debts thus leading to a catchup in collections over the portfolio’s life cycle.
If you read Page 5, it fleshes out the above quoted words.
This post addresses the PDL business. I would need to be tweaked to be relevant to CCP's other lines of business.
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