Your layman's words inclined me to post what I had read into Encore Capital's March 2023 presentation a few days ago. My words below mirror some Encore vocabulary.
Cyclicality
The PDL business should be viewed on a through-cycle basis. Consumer credit card delinquency rates wax and wane in cycles, so Encore's debt buying does too. Collections volumes are substantially determined by the stock of debtors ledgers that Encore has to collected on, so that too is cyclical, but it lags the credit card delinquency cycle. Unlike what some may think, the mood of debt-welching herd not to pay debts is not a major determinant of collections volumes.
Statutory accounting
Statutory accounting presents a rosy picture in periods of good collections relative to good buying periods. That is why Encore writes that its goal is to “Deliver strong ROIC through the credit cycle”. Calendar year 2022 was a good buying year for Encore in the USA, so its performance metrics relative to 2021 recognise that, and they look worse than 2021's performance. If you search for the word “cycle” in the March 2023 presentation for 2022 at https://encorecapital.gcs-web.com/static-files/444f109d-bab7-4581-be54-9e75c0de170f , you can read for yourself how Encore views cycles that are relevant to it.
CCP in US
CCP had a good USA buying period in calendar year 2022, and Management has announced that once forward commitments are exhausted, it will buy less PDLs in the USA. Other things being equal, CCP should now have a good collections period, which would manifest itself in FY24. For FY23, you should take the guidance provided as realistic. I underlined other things being equal, because, in spite of trying, I have not found any recent comment on collections staffing. Encore did not mention staffing as a problem in its March 2023 presentation, Any recent information that is specific to CCP's operation in the US would be welcome.
Capital raising?
I think that a CR is unlikely, because apart from running down US forward flow agreements, WAK intends to hold back on buying PDLs in the US. Less buying and the usual good collections that follow a PDL-buying spree should resolve cash flow as a problematic issue. The recent presentation informs us that the FY2023 purchasing pipeline of $183m contracted for FY23 is divided into $128m for H1, and $55 for H2. Two comments were:
Unexpectedly high volumes received under forward flows during H1
Purchasing will reduce in H2 as commitments expire
CCP Price at posting:
$15.91 Sentiment: Hold Disclosure: Held
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