Thanks for the input Tulips and JoeGambler. It helped me expand...

Thanks for the input Tulips and JoeGambler. It helped me expand what I had in mind when I wrote“Bonds may be preferred to capital raising, because they do not require changing the control of the company.” I'll cover the topic to “borrowing” rather than restricting it to “bonds”, and thus avoid getting into bonds versus term loans, and whatever other tags are used to cover commercial borrowing. Suffice to say, CCP would have no problem borrowing money subject to covenants similar to what its current lightly-used lenders have stipulated, IMO.

Capital Raising at $12.50

As I have mentioned a few times, I have always thought that raising $120 million through an institutional placement was hostile to retail shareholders. The $30m plus via the SPP did not irk me, because I could participate, but I had access to family money, which would not have been the case for other shareholders. The institutional shareholders may have got a greater relative percentage allocation than the retail investors, and I don't know if any new institutions got on the gravy train, or not.

My negative sentiment has waxed since then, because to be kind to Management, I assumed that they had an earth-shattering deal on the table that required funds quickly, and the positives of the deal would eclipse the negatives of the give-away institutional placement, but nothing came of that fond hope.

Acquisition of Collection House Book

The acquisition six months later of secondary PDLs from CLH's for $160m was not trivial, but as at 31 December 2020, the H1 report stated “The Company remains debt-free, with almost $400 million in net cash and undrawn credit.” It also stated, “On 31 December 2020, the Group acquired the Australian purchased debt ledger (PDL) book of ASX listed Collection House Group Limited . . .) Further, a large percentage of that $160m would have normally been used to buy primary PDLs, but supply dried up due to Covid-19 forbearance.

The heat-sink effect

If an entity routinely acquires debtors or stock, and receives money from these later, then if the acquiring side is disrupted, the collections side continues, eroded to a degree. Consequently, cash flow often improves when acquisition side collapses, even if the collections side decreases. I am fairly sure this happened to CCP immediately after the GFC, and to a degree one could have expected much the same from the Covid-19 pandemic. Encore Capital and Intrum who reported quarterly, soon discovered that collections held up well, and they used superfluous cash flow to buy back shares, rather than issue more as CCP did. If you Google “Intrum” and “buyback”, and likewise for Encore Capital you can see for yourself.

Bonds and borrowing

Encore Capital and Intrum both substantially use bonds to secure finance. For Intrum see http://www.intrum.com/press/press-releases/press-release-article/?id=9A418614D5EBB9F5. If you Google “ and ”Encore Capital” and “bonds” you will find similar information. Now that I have looked into bonds, and why they are less commonly used in Australia, I am happy to lump them into the catch-all word, “borrowing”, and leave it to CCP to choose the optimal packaging of its borrowing.

I like CCP's conservative approach of substantially using its own funds to fund its operation. I do not want CCP to grow faster than it can grow its collections facilities to perform as well as now is the case. Within the loose idea that a company can, other things being equal, grow at the same percentage as its ROI x Retained Earnings Percentage, I would not mind if the dividend payout ration were lowered.

A company can get a better ROI if it uses more debt, so the first sentence of the previous paragraph and the last one that mentions ROI introduce a dilemma. I'll not be so bold as to moot the optimal path that Management should choose, but I would certainly prefer funds to be borrowed to cover exigencies and opportunistic investments, if possible.