Ann: COVID-19 - Credit Corp withdraws FY20 guidance, page-77

Goodfella

I like reading comment that is contrary to my views. I have too much invested in CCP to allow egocentricity to confine me to the opinions of the like-minded.

Obviously, contrary views are better if they are well reasoned, and better yet if supported by relevant facts. I tend to hold shares for years – like a farmer who may not sell his farm in bad years if he thinks the farm is viable in the long run. Also, I rarely pay much heed to possibilities – I focus on probabilities, which being subjective, can be wrong. Even if all other things are equal, subjectivity varies from person to person, and even for an individual, it varies from situation to situation.

In respect to CCP competing against the likes of PNC and CLH in Australasia, and their counterparts in the USA, I have often posted on the topic of personality differences, which includes ethics and risk taking. For me, the personality of CCP's post-FY07 management is the company's chief differentiator. Any facts to the contrary would be welcome. Putting CLH and PNC in the same league as CCP reminds me of the Chinese man who said that the Titanic was sunk by a Jew, and on being told that it was sunk by an iceberg, he retorted, “Greenberg, Blumberg, Goldberg, Iceberg, all the same.”

New $20,000 Bankruptcy limit for filing actions

Changing bankruptcy rules would have near-zero affect on CCP, because it rarely, if ever, files bankruptcy actions. At https://www.copyright link/companie...m-casts-focus-on-ledger-sales-20190814-p52gz7 you can read, “Research conducted by financial counselling groups found Brisbane-based Collection House’s subsidiary Lion Finance had filed 512 bankruptcy actions in the Federal Court in the past financial year. Its major rival, Sydney-based Credit Corp, filed none while smaller providers were often in the double or single figures.”

Following bad press in late 2019, Lion Finance (a Collection House company) changed its internal rules to only file actions if the value exceeds $20,000, so the subsequent new legal limit matches CLH's new self-imposed limits. See https://www.copyright link/companie...ruptcy-trigger-after-backlash-20191101-p536lx . If you cannot access that site, at https://www.abc.net.au/news/2019-11...es-around-selling-debt-to-collectors/11705240 you can read, “In a statement, Lion Finance's parent company Collection House Limited said the debt collectors had increased the threshold for initiating forced bankruptcy proceedings to $20,000, from October this year.”

Impact of Unemployment

I accept that FY20 and FY21 will be significantly impacted by unemployment and other coronavirus negatives, but to what degree, I cannot be certain. You suggest that CCP is likely to become bankrupt soon, but my gut feel is that CCP will survive, and a significant percentage of its competitors will not, which is a plus. When life gets back to a semblance of normality, CCP will move ahead again, and the SP will follow suite, as it happened a decade ago. A component of that gut feel is that from a duration perspective, CCP in FY21 and onward is likely to fare no worse than it did in FY2008 and subsequent years.

The question is, would the negativity last for months, or years? I am not equipped to give a definitive answer, but I suggest that the issue is not like a light bulb that is either on or off – rather, it like a light with a dimmer that allows for a graduation of dimness. Using that analogy, I suggest that CCP will experience a small negative impact in FY20, and a larger one in FY21, with H2FY21 witnessing improvement on H1FY21. Debts are not expunged during difficult times, some will extend for longer repayment period, and some will default. Because of CCP's superior funding situation, it can, IMO, survive until FY22, whereas PNC and CLH may not.

CCP unlikely to go Bankrupt

CCP's total liabilities in FY19 were $185,869:$463,602m, CLH's were $202,594m:$229,148m, and CCP $178,709m:$102,739. CCP's accounting is more conservative than the others, so the comparable health of its balance sheet is better than the foregoing numbers suggest. CCP borrows from Tier 1 banks and its cost of borrowing is cheaper, plus the banks are less likely to recall funding. The H1FY20 report states that CCP's banking facility of $375m matures in 2022 and 2023 (one may cover PDLs, and the other the loan Book), and CCP forecast its headroom would be $200m at 30 June 2020, suggesting bank borrowings of $175m then.

CCP does not need to continuously grow – it can go into survival mode for a time, as it did in FY2008 and FY2009 under the current management. On the matter of pausing growth in more recent years, CCP has a few times reduced investing in PDLs for many months when management considered PDL prices to be toppy, and then returned to buying when prices retreated to what CCP regarded as fair value. I think CCP pays about 20c of face value for quality debt (CCP does not buy lower quality debt that sells for much less.

CCP uses bank finance because, although its cash inflows are steady, cash outflows are erratic. This is because buying some PDLs and small company acquisitions spring up opportunistically. CCP uses banking facilities to cover outflow surges, rather than sitting on a pile of cash. CCP's gearing (net debt to PDLs and Loan Book) seems to range between 20% and 50% – I understand CCP's banking covenant is 60%. CCP could hang onto more cash and lower its dividend payout ratio, as it did in FY2008 and FY2009. Since FY2010 CCP's dividend payout ratio has been typically a bit above 50%, and dividends for the decade ending 30 June 2019 were 8.0c, 20.0c, 29.0c, 37.0c, 40.0c, 44.0c, 50.0c, 58.0c, 67.0c, 72.0c.

If the value of the PDLs and Loan Book were significantly impaired, then the question of the 60% gearing covenant may arise. Changing or suspending dividends, lending less and buying fewer PDLs for a stint would allow CCP to stay within its covenant limits, IMO. The banks would prefer CCP to remain a viable purchaser of charged-off bank debts, so they would be inclined to waive short-term covenant breaches if they are provided with evidence to support a gearing improvement. Banks often approach CCP to buy charged-off accounts, so there is the possibility of a win-win arrangement (CCP to buy a tranche of PDLs for $X, and the selling bank would waive the covenant to facilitate the purchase). Because of CCP's conservative tendency, its valuations of PDLs and the Loan Book would be inclined to less impairment than would be the case of CCP's competitors.