Thoughts on USA operation

We have in recent posts given thought to CCP's operation in the USA. I think the consensus is that it is a potentially useful sleeper that costs CCP very little to keep alive while CCP waits for the supply-side dynamic of PDLs to improve in the USA.

According to Encore Capital, the USA debt-collections market is looking up for Encore as a major player, but the bit players in the business may struggle. Below is a cut and paste from a June 2015 document from Encore:

RECENT DEVELOPMENTS IN THE US DEBT MARKET ARE POSITIVE

Where markets stand today

1. Regulatory agencies (such as CFPB [Consumer Finance Protection Bureau]) are preparing to finalize regulation
   – Cost of compliance will make it difficult for sub-scale players to remain competitive
2. Further industry consolidation is expected
3. Withdrawn suppliers are preparing to re-enter the market
   – Supply is expected to improve in the next 12–18 months
4. Purchase inventory is increasingly focused on fresh paper

Points 3 and 4 imply that the supply side of PDLs is expected to improve. The poor supply-side dynamics is the reason that CCP advances for its USA operation treading water.

Points 1 and 2 imply that even if the PDL supply dynamic improves, CCP as a minnow in the USA may struggle to replicate its success in Australia. The worst case outcome may be better for CCP than the status quo, because CCP may learn that even if the supply of PDLs improves in the USA, the USA may not be a market wherein CCP can do well, and hence CCP could redeploy its entrepreneurial talent to initiatives where the potential profits are better. This would not be a significant negative – it would be the end of a hoped-for wish, but that is better than wishing in vain.

In an earlier post I mentioned that Encore Capital looked to geographic options to maximise the deployment of its capital. The array below highlights this:

....................... 2012 ........ 2013 ........ 2014 ........ 2015 est
USA ............... 100% ........ 87% ........ 50% ........ 45%
International ...... 0% ........ 13% ........ 50% ........ 55%

Apart from the USA, Encore is now in: Mexico, Panama, Columbia, Peru, UK, Ireland, Spain and India. I am unsure why Canada is missing. Encore lists as under consideration: Chile, Brazil, most of Europe (excluding Russia and some ex-USSR states), Pakistan, China, Taiwan, Indonesia, Malaysia, Thailand, Philippines, South Korea, Japan, Australia and New Zealand.

Like CCP, Encore also has the option of switching focus to older debt if buying new debt is slow. I do not think it has an unsecured loan business – a vehicle that CCP can use if it cannot source PDLs in sufficient quantities that meet CCP's profit hurdle rates. As options to deploy funds generated, both companies could also: reduce debt, buyback shares, increase dividends, and acquire businesses. Encore has a history of share buybacks and acquisitions, which CCP does not have. Encore does not pay dividends, which is not unusual for USA companies.