Don't take much notice of my recent spate of posts – I hurt my back, and being housebound I have been more active on HC, and searching the Internet generally, than usual.
In my recent comment on the Intrum Q4 Report, I forgot to mention that: a) PDLs purchased post-Covid are proving to be more profitable than normal in spite of debt moritoria crimping supply; and b) PDL supply was expected to increase in 2021. This probably applies to CCP and Encore Capital too.
The Intrum Q4 words were:
- Impressive performance in Portfolio Investments, investment levels at replenishment rate with attractive returns.
- The year's adjusted portfolio investments amounted to SEK 5,129 M (7,556). The annual investment pace was at replenishment level and made at returns above pre-Covid levels. The return on portfolio investments was 12 per cent (15).
I have read this improved-returns sentiment in one or two previous quarterly announcements, and I have a recollection that Encore Capital reported something to that effect during calendar year 2020.
If PDL supply deminished in 2020, buying pressure must have eased off to deliver better value for PDL buyers. In Australasia, self-inflicted liquidity problems would have toned down purchasing by PNC and CLH, boding well for CCP to do well as PDL supply increases at a time when CCP is cashed up and debt free – far better positioned than Encore and Intrum who rely on borrowed money obtained via commercial bonds.
CCP, Encore and Intrum all expect supply to increase over 2021. Encore stated in its Q3Y2020 Report,
“. . . our strong balance sheet and our liquidity have positioned us well for the substantial increase in charged-off receivables we believe is coming to the U.S. and U.K. markets in 2021 and beyond”. I suspect CCP is going to grow its USA volumes significantly, either via purchasing primary PDLs or secondary PDLs as CCP did buy acquiring Baycorp and by acquiring CLH's PDLs.
PostscriptI'll augment that story-style explanation of how fair-value accounting generating profits by revaluing PDLs. The revised story-style explanation now is:
- Company X buys PDLs for $1m – revalues them at $1.3m – makes a statutory profit of $.3m without actually collecting on the debt.
- To repeat the fiction of profitability, Company X must buy more PDLs, preferably more than at first, and revalue them soon.
- To fund more purchases, money is raised via borrowings or capital raising, and the stellar profit performance facilitates this.
- If management has a large holding, the part of that can be sold into a exuberant market, as was the case with CLH a few years ago.
I point out that diluting one's holding via capital raising is conceptually little different to selling some of one's shares. If you have invested in the PDL sector, you might recognise some of the above behaviour.
Note that I am commenting on the health of CCP's business, not the CCP share price. The easy money to be made when shares were $12.50 or less some months ago no longer exists at an SP above $30. I'll substantially stay invested, because I am unaware of a compelling alternative, and because of the long runway of the USA business, CCP can grow for a long time. Also, it would take me much effort to develop a deep understanding of a new-to-me stock.
(20min delay)