Why Is Share Price Tanking?, page-322

I really do not want to go on and on about the impairment, but for my own use I looked at the matter today with the benefit of having Enron Capital's H1Y20 results, and as I have written myself a note, I may as well paste it.

Yesterday Encore Capital initially provided sufficient information for me to approximate what percentage of its collections its $US109m impairment was. A few hours later detailed accounts were published – see https://encorecapital.gcs-web.com/static-files/7c374f84-c0a1-45fc-b641-5e52dfe8b17c, and I looked for information that interested me.

Encore stated that in Q2 it collected $US108.572m more than expected – close to the $US109 that it impaired in Q1. It has recognised $US108,572k reversal in Q2, but in effect it created a new impairment of $US42,565k for the future, because Encore now expects  to reduce later collections by $US42,565k.

“Impaired” is the term used by CCP, not by Encore, who imply the matter is a collections delay, not a loss, but in effect it adjusts its PDL carrying value in the same way as CCP does. This means Encore's current impairment is $US(109 - 42.565)m, or $US57.435m. That is about 2.8% of its annual collections of $US2050m (estimated), compared to CCP's 14.05% (based on CCP's FY20 annual collections of $488.34m).

I'll discuss the following metrics obtained from Encore's calculation of its PDL value. I derived the Q1 column by subtracting Q2 from H1. Pasting to HC lost my colour highlights, but I changed some metrics to bold font to assist finding them.

	Column 1	Column 2	Column 3	Column 4
0	​	Q2 2020​	Q1 2020​	H1 2020​
1	Opening Balance [PDL carrying value]​	3166018​	3003886​	3328150​
2	Purchases of receivable portfolios​	147939​	214113​	362052​
3	Deconsolidation of receivable portfolios(1)​	-2822​	0​	-2822​
4	Put-backs and Recalls​	-6326​	-5068​	-11394​
5	Disposals and transfers to assets held for sale​	-1182​	-1531​	-2713​
6	Cash collections​	-508215​	-527279​	-1035494​
7	Revenue from receivable portfolios​	335287​	357365​	692652​
8	Changes to expected current period recoveries​	108572​	10315​	118887​
9	Changes to expected future period recoveries​	-42565​	-108976​	-151541​
10	Portfolios allowance reversal, net​	—​	—​	—​
11	Foreign currency adjustments​	4535​	-101071​	-96536​
12	Balance end of period [PDL carrying value]​	3201241​	3166018​	3201241​

Collections for Q2 were $508,215k. The $335,257 below that is, I believe, interest levied against the PDLs. The $108,572 recognise unexpected collections, in effect reversing much of the $109m impairment made in Q1 ($108,976k). The $42,565 recognises collections that were expected later. What I have called PDL Carrying Value is probably a misleading name. The PDL value is ten times, or more too large, and I suspect there is a credit line item that is effectively amortisation, and the carrying value would be net of that. I did not delve into that matter, because I have decided to use collections as the denominator in my percentage calculations. CCP's PDL carrying is fairly close to its annual collections.

In the percentages below, there are two columns for Encore – one for Q1, and the other for Q2. All I am trying to imply is that CCP's impairment may be generous, and we may see some paring back of that in FY20, or CCP may prefer to let impairment reversals seep out when the cash comes in. The calculations may be slightly different to earlier posts, mainly because the Collections are estimates, and I have changed those slightly for Encore (2000m changed to 2050m)

	Column 1	Column 2	Column 3	Column 4	Column 5
0	​	Intrum​	CCP​	Encore Q1​	Encore Q2​
1	​	Skr billion​	$A million​	$US million​	$US million​
2	Impairment​	636​	68.576​	109​	57.435​
3	Collections​	10770​	488.34​	2050​	2050​
4	% of Collect​	5.91%​	14.04%​	5.32%​	2.80%​

Encore's comments are interesting, so I paste them below.

During the three months ended March 31, 2020, the Company reassessed its future forecasts of expected recoveries of receivable portfolios based on its best estimate of the potential impacts arising from the COVID-19 pandemic and recorded a provision for credit loss adjustment of $109.0 million. Based on the best information available to the Company at that time, the Company estimated that certain near-term future recoveries in 2020 would be delayed but that the majority of the portion of delayed collections would be recovered in 2021 and most of the remainder of those expected collections would be recovered in subsequent periods. During the three months ended June 30, 2020, the Company’s collections performance was significantly stronger than expected, which resulted in an over-performance against the updated forecast by $108.6 million. While the Company now has additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries in the second quarter, management considered historical and current collection performance, uncertainty in economic forecasts in the geographies in which the Company operates, and believes that most of the over-performance during the three months ended June 30, 2020 was a pull-forward of future expected recoveries rather than increased lifetime recoveries. As a result, the current period over-performance reduced estimated remaining collections (“ERC”, which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $42.6 million during the three months ended June 30, 2020. The circumstances around this pandemic are evolving rapidly and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.