Ann: Credit Corp Group H1 of 2018 Results Presentation, page-25

That another financial crises will happen is a fact. That CCP will be harmed by it is not a fact, I is a possibility, and its probability would vary from person to person.

The statement, “The problem in 2007 with CCP was that people could not repay their debts. This will happen in the next crisis too” is moot. As far as I know collections may not have declined (I could not locate the FY2008 Annual Report to verify what happened). If collections did decline, there are other reasons that would have caused this – namely, the decline in fresh PDLs to collect on in FY2008, and the inexperience of new collections staff.

If collections did not decline because people could not pay debts, then there is no reason why they should decline in a future financial crises for that reason. If lenders can, and do, pay their debts, then the PDL supply would be so small that CCP would never have commenced business. Debt delinquency is the lifeblood of debt collectors, and for them it is a net plus, not a negative factor.

I think that the only nexus that CCP's near-death experience had with the GFC, was that the general exuberance that proceeded the GFC inflicted CCP's managers too – they succumbed to the grow-grow-grow-borrow-borrow-borrow zeitgeist. CCP's too-rapid growth and its burgeoning debt caused the mischief. Managerial exuberance up until late calendar year 2007 can be seen in the FY2007 Annual Report at https://www.asx.com.au/asxpdf/20071005/pdf/314ysnqgc5ly85.pdf. The then CEO bought CCP shares using margin loans, and when he dumped shares to cover margin calls, that exacerbated downward pressure on the SP.

CCP's problems started to show in late calendar year 2007 (in H1FY2008), and they were serious enough to occasion a swift change of top management, which proved to be the right tonic. I could not locate a FY2008 Annual Report, which would have helped me get better evidence of what happened then, and what remedial action was underway. From browsing the Internet, I learned that from 30/06/2003 to 31/12/2007, total assets grew from $17m to $230m, and at 31/12/2007, the CCP’s net debt-to-equity ratio exceeded 200%, and $145m in debt that was earlier classified as long-term became short term. Rapid growth also created staffing problems – two thirds of the collections team had less than 12 months’ experience. Recruits were unproductive per se, but to make matters worse, mentoring them detracted from the efficacy of experienced debt collectors.

The new CEO quickly changed the management team reporting to him, and CCP dramatically reduced buying PDLs in 2008 to deploy cash to pay down debt. CCP focused on collecting older debt with a smaller experienced collections team, with great success I may add.

If a debt collector routinely buys large quantities of PDLs, the tendency is to focus on the easier-to-collect new debt, and not the older debt. On balance, collecting on old debt may be roughly as profitable as collecting on new debt, because the lower collections per hour of effort is offset by lowering the write-offs that would happen if the old debt received little attention. As an aside, for stints of time, collecting on older debt is a useful buffer to keep the collection teams profitably busy when PDL buying temporarily retreats at times for reasons of either elevated PDL prices or the want of funds.

CCP's disaster was quickly arrested in FY2008. By 31/12/2008) the turnaround was evident – see http://member.afraccess.com/media?id=CMN&filename=20090217/00927817.pdf for the FY2009 half-year report.