Tim is a journalist, so he is entitled to journalistic licence,...

Tim is a journalist, so he is entitled to journalistic licence, and nobody should expect him to write in a non-journalistic style. I underlined the exaggerated language in my previous post to emphasise this point.

When looking at Intrum's financials a few weeks ago, the value of its PDL carrying value seemed far too high relative to the usual PDL amortisation, and relative to the small Covid-19 impairment it made compared to CCP. I revisited the matter this weekend, and concluded that Intrum only reports “gross collections”, because it has partners in joint ventures who get a slice of the “collections”. Consequently, the ratio of PDL carrying value to collections is high. Having spent hours comparing Encore, Intrum and CCP in that study, I have metrics that may interest some HC readers – hence the information that follows (in coloured font), which I wrote on Sunday. It repeats things stated here, but I am not going to waste time editing the whole post.

In summary, my take-away is that CCP's accounting for profit, and hence asset values, is conservative, and within that mindset, CCP's Covid-19 impairment is too generous. The one negative view that I have about Management is that it diluted the shareholdings of existing retail shareholders by raising (via Instos) capital that CCP may not need at a time when the SP was low – in contrast Intrum actually bought its own stock in the half year ending 30 June. CCP probably does not have the collections teams to process the PDLs that its pile of cash enables it to buy, so where are funds going to be deployed. One option is to pay a catch-up dividend, which in a sense is an admission that the capital raising was a mistake, and an alternative is acquire a competitor that has a good collections facility (PNC, perhaps, or a US company).

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I compareed CCP with Encore Capital and Intrum to confirm my view that:

• CCP usually amortises PDLs more generously than the sector does, and hence it had leeway up its sleeve to handle Covid-19 without generously impairing PDL carrying value;
• but in spite of that, it impaired far more generously than Encore and Intrum.

I have no problem with that conservatism.

When I initially guesstimated what CCP would impair in response to Covid-19, I selected $10m, but decided that it was more a matter of Management's choosing than the reality of the situation. I held that $10m opinion because, relative to the sector, CCP has the:

1. highest ratio of effective PDL carrying value impairment to collections;
2. highest ratio of Collections to PDL carrying value.

I thought that CCP had the leeway to either not impair, or only do so in a minor way. What escaped my attention, was that CCP probably had a higher proportion of fresh PDLs, because in the face of aggressive PDL purchasing by the sector a few years ago, CCP reduced its PDL purchasing and diverted funds to the Loan Book, but recently it switched to investing more in PDLs. The relative freshness of CCP's PDLs exposed CCP to more impairment risk.

I have not attempted to investigate the “relative freshness” matter, but my gut-feel is that the Covid-19 impairment of $68.7m was too high. For the above Points 1 and 2, here are some supporting metrics:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCP . . . Encore . . . Intrum
PDL amortisation to Collections . . . . . . 47% . . . . 37% . . . . 40%
Collections to PDL carrying value . . . . 86% .. . . . 63% . . . . 32%*
Covid-19 impairment/carrying value . . .16% .. . . 1.3%** . . . 2%
* This is too low, but Intrum calls it Gross Collections, suggesting something has been excluded – perhaps a share that “partners” in many countries collect. I think we can rely on Intrum's 40% Amortisation/Collections ratio, it being about normal for the sector, but not for CCP.
** Encore first impaired $109m for Covid-19 in Q1, but reduced it to $42.565m, or 1.3% of PDL carrying value.

The foregoing are not exact calculations, because there are approximations in the underlying metrics, like PDL carrying value. Where I have 16% above, CCP stated Impairment was 13.5%, because when that was calculated, the PDL value was higher than what it was on 31/03/2020. However, the rough percentages suffice to convey the message that CCP amortises at a much higher percentage, and the flip-side of which is that it recognises less Revenue. Consequently, as one would expect, CCP's collections are closer to the PDL carrying value, the flipside of which is that relative to collections, CCP has a lower PDL carrying value – the relative percentages being CCP at 117%, and Encore at 158% (after Covid-19 impairments). Intrum can be ignored for this calculation.

If one looks at CCP's metrics for the last five years, one can see that it amortises PDLs at about 47% of collections, and books 53% to revenue. I have not examined Encore capital's accounts for that long, but in loose terms its respective percentages are 37% and 63%, but the percentages vary more than is the case with CCP.

Because we are focused on ratios, the underlying raw numbers, which are not included in this post, used the original currencies reported.