Covid-19 -- Keeping an Eye on Encore and IntrumTo get a feel for...

Covid-19 -- Keeping an Eye on Encore and Intrum

To get a feel for the likely impact of Covid-19 on CCP, I also look at news relating to Encore Capital for the USA picture, and Intrum for Europe. Encore will publish its H1 (Jan-Jun) for 2020 on the morning of 5 August, and Intrum published their H1 announcement on 23 July.

The Intrum report was positive in the sense that things are transpiring to be better than expected, and that due to lower PDL prices, fresh PDLs are more profitable than they were. Read https://www.intrum.com/press/press-releases/press-release-article/?id=785CAB5B9CBC2F19#Interim_Report_JanuaryJune_2020 and form your own opinion.

Intrum has a collections-as-a-service business (Credit Management Service) and a PDL business (Portfolio Investment). The latter has a much higher profit-to-revenue ratio. Because businesses in Greece, Italy and Spain are new (similar to CCP's USA business) these three countries have been separated into a third reporting unit (Strategic Markets) that handles both styles of business.
Confessing Sins

In my 45145653 posts, I made a significant proration error when I prorated Intrum's PDL Covid-19-related impairment to CCP. An arithmetic error was to use .6 as a factor rather than .06. An error of approach was that I used the PDL carrying values as a factor of size, and that is a moot basis to select.

On arithmetic, the currency ratio is $1.00 = Skr 0.16, so one can divide kroner by 16, or multiply by .0625 (or .06 as a round number), and I multiplied by .6. On the relative-business-size factor selected, there is a difference in carrying value caused by CCP aggressively amortising PDLs, and Intrum less so. This means that one cannot simply prorate from Intrum's PDL business to CCP on the basis of PDL carrying value. I did so very roughly, and hence got a ratio of Intrum being six times larger than CCP. However, on a PDL collections basis, Intrum is only roughly twice the size of CCP. Further, the ratio of fresh PDLs in the PDL carrying value has a significant impact, so we should recognise that CCP had an unusually high ratio of fresh PDLs.
So What?

Whatever way one approaches the proration, the fact remains that CCP's impairment of $68.6m compared to Intrum's impairment of Skr636m, or 636/16 = $39.750m, is high – half that would be $20m. Now that we know what Management decided, there is little gained by trying to come up with a more realistic impairment value. If the $68.6m is too high, the value is still within the business, but it is hidden by undervalued PDL carrying value, and for a long-term holder, it makes little difference. If the capital raising was an overreaction, which I think it was, that too is spilled milk.