Joe Gambler
ERC is increased in the sense that it was expected to fall had payments been made, but because they are anticipated to be delayed it increases?
It is a matter of reporting cycles and automated analytics. In Intrum's case, some repayments were skipped when Covid-19 emerged, and the automated analytics translated that into lower expectations, which reduced ERC for Q1, and hence the Carrying Value, which would have been effected via a specific “adjustment” attributed to Covid-19. By the time Q1 Report was being being drafted, evidence had emerged suggesting that repayments were substantially delayed, not welched. The renewed optimism was expressed in words, but not in the Q1 statutory accounts that had been closed off. Much of the original Covid-19 adjustment was reversed in Q2, which increased ERC.
How does a delay in payment increase the collections potential?
Ignoring late fees and extra interest caused by a longer time, which would anyway be eroded by waivers, it is not the collections potential that increases from Q1Y2020 to the end of the life of PDLs, it is the statutory accounted collections after Q1 in Intrum's case, and potentially after H1FY2020 in CCP's case.
If conditions prove better than expected by CCP, say unemployment lower and recovers faster than thought, the PDLs will surely 'over earn'.
Existing PDLs will not “over earn”, they are likely to “under earn” a bit due to waivers, repayment moratoriums and some losses. However, CCP captured that expected loss in FY2020 in an aggressive manner, so some of that “impairment” is likely to be reversed over FY2021 and FY2022, either overtly, or covertly.
For fresh PDLs, the news from Intrum and Encore is that they are “over earning”, because PDL prices have dropped. CCP may not evidence the same thing, because it tries to buy PDLs at a fair price, but in that 2018 interview with Alan Kohler, Thomas Beregi admitted that they did “over earn” for a while. Competition from the likes of PNC later pushed PDL prices up. CCP may be more careful in future not to make the sector too attractive to competition in Australasia where it can influence PDL prices. In the US, CCP is stuck with one large forward-flow agreement at old prices, and it is less likely to “over earn” because of that. However, the provisioning for that ($11m from memory) may turn out to have been too generous, and flow back into FY21 profit
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