CCP - getting smashed, page-27

To put my own spin on the reasons given by ThorntonC as to why CCP raised capital earlier, it was for an intertwined set of reasons. Management expected PDLs to drop in price because CCP knew that the usual buyers in both Australasia and the USA were financially stressed. This meant that attractively priced PDLs were expected, and CCP wanted to be able to buy them, particularly because it had held back from buying for a stint in both geographies when it deemed prices to be too high, and it needed fresh PDLs to collect on. I also read into the Announcement that one or more distressed PDL buyers could come on the market.

CCP subsequently used $65m of that CR money to buy Baycorp from its USA owner, Encore Capital, and it proceeded to expand in the USA.  Expanding the PDL carrying value in the USA, required CCP to virtually double its collection capability there by opening a second USA collections centre.

Baycorp was founded in NZ, and it had expanded to Australia, where it was a significant operator. This strengthened CCP's position in NZ. Also, because Baycorp had been more into collecting-as-a service than CCP, acquiring Baycorp strengthened CCP's relatively small service operation in Australia, which would enhance its ability to tender for and win contracts from both Government (ATO for one),and large utilities.

The current CR may be a mixture of similar reasoning, with the Covi-19 factor added. Covid-19 occuring when it did was more inconvenient to CCP than would have been the case a few years earlier when it had a more normal component of fresh PDLs in stock, and the USA operation was treading water at low cost to CCP, and that low-key operation could have been kept low-key longer. Whether CCP now can, or wants to, digest yet another acquisition is a moot point, so it may not, but I think it sure would like to buy PDLs at a price that factors in Covid-19.

On another point, the lending business simply gives CCP an alternative place to deploy cash if the prices of PDLs' are deemed to be expensive. Provided the collections teams can be kept busy, it is probably a matter of relative indifference where the money is deployed. CCP may, if PDLs are cheap, cease advertising its lending business, and hence lower its marketing costs. When CCP is more established in the USA, it may want a lending business there to have the flexibility to keep collections teams busy when PDLs become expensive.

Of course, there could be a skeleton in the cupboard of which I am unaware.