I think CCP is going to impair the carrying value of their PDLs, and the value of the Loan Book, but I have no feel for the quantum of this number. Management has a degree of discretion here. CCP. in my view, tends to undervalue these assets via aggressive amortisation of the PDLs and up-front provisioning of the Loan Book, so if it does not want to frighten the horses, it may be happy to have these assets at a realistic value for now, and not at the historic under valuation. By continuing its current conservative accounting, CCP can return to its wonted level of undervaluation within a few years.
Large firms like Encore Capital and Intrum AB have made significant impairments, and then saying that they have not experienced a significant slowing of collections to date. I suspect that some firms in this game have inflated asset values, and they may grasp Covid-19 as a not-management's-fault excuse to bring the valuations closer to reality. Also, there are taxation advantages to be gained by taking on a large impairment expense, and if reality transpires to be better, the taxation would at least have been delayed. For now, I have simply picked $10m as an impairment, and wonder how wrong this will transpire to be.
On the pricing of PDLs, forward commitment pricing are locked in, but new pricing would be used in future. The 29 April Announcement stated, “Credit Corp is in the process of renegotiating some of the arrangements given the decreasing collection percentage.” In Australasia, CCP is in a strong negotiating position, because competitors, especially PNC and CLH, are strapped for funds, and Baycorp is now morphed into CCP.
CCP Price at posting:
$20.42 Sentiment: Buy Disclosure: Held
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