Encore Reports Earnings Drop in Q4 and Full-Year 2006

Encore Capital Group, Inc., a leading distressed consumer debt management company, reported consolidated financial results for the fourth quarter and full year ended December 31, 2006.

Commenting on the quarter, J. Brandon Black, President and CEO of Encore Capital Group, Inc., said, "Our fourth quarter was a solid one in most respects, as collections, revenue, and adjusted EBITDA increased over the prior year. Our results were positively impacted by a large sale of accounts that we financed under our previous credit facility. These were accounts that were neither active payers nor in our legal channel, and would have cost us more to collect than the applicable servicing fee. Therefore, we took the opportunity to sell these accounts at a positive net present value and redeploy that capital into opportunities expected to be more profitable. The sale had a significant impact on our zero basis collections and revenue during the quarter and on our contingent interest expense. Excluding the effect of the sale, our net income would have been $5.5 million for the quarter and our earnings per fully diluted share would have been $0.23 for the quarter.

"We continued to see encouraging results from our investments in new liquidation initiatives in the fourth quarter. The newer initiatives in our legal channel, our growing collection team in India, and the increased volume of healthcare receivables that we can now service in-house are steadily increasing our ability to liquidate portfolios across a wider variety of asset classes and account balances. With our improving collection capabilities, we were able to more actively compete for portfolios in the purchase market, which resulted in our highest level of quarterly purchases in 2006," continued Mr. Black.

Commenting on the outlook for Encore Capital Group, Mr. Black said, "The upfront costs associated with these initiatives, as well as the diminishing contribution from older, higher multiple portfolios, have negatively affected our results of operations in 2006 compared to 2005. While there are initiatives and factors that could change our outlook, this earnings trend is expected to continue in 2007. We view 2007 as the second year in a two-year investment and transition period for the Company. The investments we now are making, although adverse to our short-term results, are essential for maintaining our long-term competitive advantage in an environment of higher pricing for portfolios. We expect the negative impact of these investments to be most pronounced in 2007 and should, in the long term, result in improved collections and solid growth in revenues, earnings and cash flow."

Financial Highlights

Revenue recognized on receivable portfolios, as a percentage of portfolio collections, was 69% in the fourth quarter of 2006, compared with 75% in the fourth quarter of 2005. The lower revenue recognition rate was attributable to the unseasonably high collections related to a large sale of accounts during the quarter.

The Company generated $3.2 million in fee-based revenue during the fourth quarter of 2006, compared with $4.4 million in the fourth quarter of 2005, primarily through the Ascension Capital bankruptcy services business. Fee- based revenue was impacted by a decline in account placements at Ascension Capital following bankruptcy reform.

Total operating expenses for the fourth quarter of 2006 were $48.2 million, compared with $38.0 million in the fourth quarter of 2005. Fourth quarter 2006 operating expenses included stock-based compensation expense of $1.3 million, operating expenses of $3.9 million related to Ascension Capital, which is a fee-based business, and costs related to the consideration of strategic alternatives of $0.5 million. Excluding these items, operating expenses were $42.5 million in the fourth quarter of 2006, compared with $32.9 million in the fourth quarter of 2005, while operating expense per dollar collected remained consistent at 45% compared to 46%.

Total interest expense was $9.0 million in the fourth quarter of 2006, compared to $7.8 million in the fourth quarter of 2005. The contingent interest component of interest expense was $5.8 million in the fourth quarter of 2006, compared with $4.6 million in the same period of the prior year. The year over year increase was primarily the result of a large sale of accounts financed under the Company’s previous credit facility.

During the fourth quarter of 2006, the Company spent $63.6 million to purchase $1.4 billion in face value of debt. Asset classes purchased in the fourth quarter included credit card, healthcare, auto deficiency, telecommunications and consumer loans. For the full year of 2006, the Company spent $144.3 million to purchase $3.7 billion in face value of debt.