Ann: COVID-19 - Credit Corp withdraws FY20 guidance, page-65

The GFC and Coronavirus nexus

Basically I was responding to posts that implied that CCP's share price crash in FY2008 and recently have a nexus in that both were at a time of historic problems. I do not agree with this viewpoint, and I suggested that the FY2008 problem had nothing to do with the GFC, so I supplied information that, IMO, explained why CCP had a problem in FY2008.

I was also responding to the view that in times of unemployment, CCP and the sector have problems, because folk stop paying debts. This did not happen in the GFC, as CLH's results showed, and CCP actually improved its collections in a relative sense at a time when it was not buying. My post was very long so I did not supply information that showed that in the years ending June 2007, CCP was collecting on new PDLs, which are the easiest to collect, and older PDLs were being ignored, but from FY2008 CCP started working its older debt more effectively, and that saved the day. See also the comment in the Postscript below on the matter of collections lagging paper profits.

Unemployment is unemployment, so considering the debtors' side of the collections dynamic, it may makes little difference what causes unemployment, so there is an unemployment nexus between the GFC and the current crisis.

Collections needs Collectors

From the collectors' side of the collections dynamic, the coronavirus has the potential to slow down collections. We would need to receive information from Management on this matter. Alternatively, some other HC posters may have worthwhile views on the issue

I am unsure how many collection centres CCP has in Australia, New Zealand, Phillipines and the USA – perhaps half a dozen in total. Gathering people together in these may not be possible, but there are two mitigating factors, namely:

• Collections work is basically call-centre work, with contact via eMail and telephone – potentially, much of this can be dispersed away from large call centres, but I am unsure what hassles and inefficiencies may be involved.
• The 80% of collections made from agreed repayment plans would require little contact work, as most would pay via prearranged bank transfers. The remaining 20% would require more telephone-cum-eMail contact. A significant problem is the contact required to shift the usual percentage of new PDL debtors to agreed repayment plans, so this task would have to suit people working from home.

Postscript

The accounting requirement to value PDL's at fair value (FV) may have introduced a moral hazard. If new PDLs are processed to the point where the tranche of debtors has a reasonable percentage of debtors quickly converted to agreed prepayment terms, then these debtor are more valuable,. If the PDLs are valued at FV, then paper profits are generated before the cash is collected. This could mean that as long as new PDLs are acquired, and quickly made more valuable, management bonuses kick in, good earnings raises the SP, and everybody is happy. The temptation would be to acquire PDLs with borrowed funds, perhaps even on-sell the collection streams, as CLH seems to have done. I never understood what PNC's hassles with its auditors were, but it was about implementing FV.

As long as PDL amortisation was a high percentage of collections, I had no concerns that CCP was inflating profits (net credits to the P&L Accounts), and inflating PDL valuations (net debits to the Balance Sheet). However, I understand that pursuant to the AASB9 Financial Instruments accounting rules, the concept of PDL amortisation disappears. I hope CCP continues showing collections and amortisation as it has done thus far.

Treating PDLs like bonds is I think a mistake. I have no accounting qualifications, so I write this Postscript with apprehension.