Ann: Credit Corp Group H1 of 2023 Media Release, page-39

Joewolf

I did not intend to write the information below, unless asked to do so, but inclement weather kept me indoors, so for the want of something to do, I changed my mind.

PDL Purchase Price

When CCP buys a PDL, its gurus predict how it is likely to perform in terms of expected repayment receipts and their timing over six years. I presume they derive an expected cost-to-collect schedule using standard costing – that is, overhead costs are included. This, together with a target rate of return, adjusted for time, is used to set the price that CCP is prepared to pay for PDLs.

Initial Balance Sheet Value

The purchase price of the PDL is used as the PDL's initial balance sheet value.

Subsequent Balance Sheet Value

In reality, the asset probably gains value if the conversions to agreed repayment plans exceed expectation, and in theory the PDL could be revalued, with the contra credit posting ending up as increased profit. In practice, CCP does not up-value PDLs – it waits for more-than-initially-expected receipts to be recognised for profit on receipt of payments that flow from fully amortised PDLs. However, if the dollars were significant, CCP could adjust the balance sheet value, and the contra credit would end up in profit before tax.

PDL Impairment

If CCP's subsequent expectation is meaningfully worse than initially expected, CCP would impair the asset, with the contra debit posting ending up decreasing profit, which was what CCP did at the start of the Covid pandemic to the tune of $68.576m. I do not recall ever seeing that impairment overtly reversed in part in later financial years, which I think is strange, as is the note in the 2022 Annual report that reads, “FY2020 NPAT excludes COVID-related impairment and loan provisioning.”

PDL Amortisation

Amortisation is linked to repayment receipts by a simple proration. If a PDL is purchased for Dollars X, and receipts are expected to be Dollars Y over a six-year life, then each dollar received is amortised by X/Y. If for each dollar invested in a PDL, $2.18 was expected in receipts, then amortisation for that PDL would be 1/(2.18), which is 45.87%. The relationship between the PDL collections and PDL amortisation in recent years has been reported as (dollar values as $000):

............................. 2022 ............ 2021 ............ 2020 ............ 2019 ............ 2018
Collections....... 535227 ........ 492138 ........ 488340 ........ 403794 ........ 380901
Amortisation... -245231 ...... -225295 ....... -233020 ....... -183789 ...... -173329
........................ 45.82% ........ 45.78% ........ 47.72% ........ 45.52% ........ 45.50%
Covid impairment ....................................... -68,576