On the sucked-from-my-thumb $10m, I am loath to attach much credence to it. What I write below may not help either, because I simply do not know the answer, but you can be sure that CCP's management have a very good feel for the issue, and with luck they will tell us soon (mid-July).
I know that Intrum AB (Swedish-based but Europe-wide operatiojs) impaired about $A100m, and I simply divided that by 10 to scale it back to differences in size and other factors. Scaling for size would give $60m, so I could be far out. There are issues of geographic footprint (24 European countries) and managerial style that suggest that $60m would be too high. The Intrum quarterly report is at https://www.intrum.com/media/7857/iab-q120-eng.pdf . There are about 6.25 Kroner to the Australian dollar.
The nature of the problem for Intrum varies according to a north-south divide. It is worse in the south – those counties that have a Mediterranean coastline, which includes France. This is what I would expect. My father always said that Africa starts at Calais. Intrum is far more aggressive in pursuing debt via the courts than CCP does, and in the “South”, courts were closed by lockdown. Lastly, Intrum is more leveraged than CCP, as is the case for virtually every company in the debt-buying sector. As I wrote before, firms like Intrum point out the Covi-19 potential negatives, then say things like:
“Although operating results for the first and second quarters will be lower than our previous internal expectations, we anticipate what is happening now will create substantially larger business volumes to work with in the latter part of 2020 and the years ahead.”
“We expect, however, to continue recovering these amounts later, which is supported by the historical patterns we have seen in previous economic cycles.”
This suggests to me that Intrum has over accounted for Covid-19. No bonus this year, but management may as well set themselves up to score fat bonuses for calendar year 2021, which is Intrum's financial year.
As an aside, CLH has been in trading suspense since mid-February, because auditors refused to sign off. Today it announced it had reduced PDL carrying value by $89.9m to $337.6m. I have always thought that it was under amortising the carrying value. PNC could follow, its effective rate of amortisation was even lower than CLH's, and PNC effectively amortises over ten years, compared to CCP's six. CLH compunded its problem by making revenue look even better by selling its agreed-repayments book, or parts of it. One can take a great deal of comfort from CCP's very conservative approach to profit recognition and debt leverage.
Free Cash Flow
In summary, I am not concerned about free cash-flow. Cash flow re-invested in PDLs at a pace that the collections teams can handle is the best home for cash, IMO. In the USA, there is a need to bring the size of the business up to the point where its profitability more closely reflects the situation in Australasia.
When it comes to cash outflow into assets, the relevant consideration is the near-cash spectrum of the assets. PDLs are reasonably close to near-cash in concept. Statistically, the outlay to buy PDLs is recovered in something like 15 months, and it comes in at a fairly constant stream, with 80% collected via agreed repayment plans. Most of the PDLs are bought via forward-flow agreements to take up PDLs monthly. Consequently, cash flow in both directions is reliable and predictable. This beautiful balance is predicated by one factor – the ability to collect. There is not much purpose buying more PDLs than one can process, as CCP learned a dozen years ago.
CCP uses very little debt supplied by Tier 1 banks at low interest rates. As long as CCP functions within its self-imposed limits, I am comfortable.
CCP Price at posting:
$20.37 Sentiment: Buy Disclosure: Held
(20min delay)