Encore Capital Group Announces Financial Results for Q4 and Full Year 2015

Yesterday, Encore Capital Group (ECPG), an international specialty finance company with operations in eight countries that provides debt recovery solutions for consumers across a broad range of assets, reported its financial results for the fourth quarter and full year 2015 ending December 31, 2015.

In a separate press release ECPG announced an agreement to divest wholly owned subsidiary Propel Financial Services (Propel). “To focus on our higher return investments and in order to maximize our returns on invested capital, we’ve reached an agreement to divest our tax lien subsidiary, Propel,” said Kenneth A. Vecchione, the Company’s President and Chief Executive Officer. “The sale of Propel provides significant benefits to Encore. In addition to allowing us to take advantage of new opportunities for higher returns both in the U.S. and around the world, this transaction will allow us to improve our liquidity and lower our leverage.”

Encore had acquired Propel in 2012. The transaction is expected to close before the end of the first calendar quarter of 2016. The deal would establish Propel’s enterprise value at slightly more than $340 million. Once completed, the sale transaction is expected to generate more than $150 million of after-tax proceeds for Encore.

As a result of the agreement to sell Propel, Encore booked a non-cash goodwill impairment charge of $49 million dollars in the fourth quarter. On a cash-on-cash IRR basis, Encore’s 3 year-ownership of Propel is expected to conclude as a nearly break-even investment.

Fourth Quarter Highlights

• Estimated Remaining Collections (ERC) grew 10% to a record $5.7 billion, compared to $5.2 billion at the end of last year.
• Gross collections from the portfolio purchasing and recovery business grew 6% to $417 million, compared to $394 million in the same period of the prior year.
• Investment in receivable portfolios in the portfolio purchasing and recovery business was $293 million, to purchase $4.1 billion in face value of debt, compared to $259 million, to purchase $2.4 billion in face value of debt in the same period of the prior year. Encore deployed $148 million in the U.S., $69 million in Europe and $76 million in other geographies during the fourth quarter of 2015. Encore’s subsidiary Propel Financial Services also purchased $52 million of tax liens during the fourth quarter of 2015, raising Encore’s total deployment in the quarter to $345 million.
• Total revenues increased 8% to a record $298 million, compared to $277 million in the same period of the prior year.

 Full Year Highlights

• Gross collections from the portfolio purchasing and recovery business grew 6% to $1.70 billion, compared to $1.61 billion in 2014.
• Investment in receivable portfolios in the portfolio purchasing and recovery business was $1.02 billion, to purchase $12.7 billion in face value of debt, compared to $1.25 billion, to purchase $13.8 billion in face value of debt in the prior year. Encore deployed $506 million in the U.S., $424 million in Europe and $94 million in other geographies during 2015. Encore’s subsidiary Propel Financial Services also purchased $220 million of tax liens during 2015, raising Encore’s total deployment for the year to $1.24 billion.
• Total revenues increased 8% to $1.16 billion, compared to $1.07 billion in 2014.

insideARM Perspective

The ECPG quarterly reporting provides an excellent overview of the debt-buying industry. To get even a more robust view of the market the ECPG reports should be viewed in conjunction with the Portfolio Recovery Associates (PRAA) reports. (Editor’s note: PRAA is expected to report earnings later today.  insideARM will report on that announcement in tomorrow’s newsletter.)

Both ECPG and PRAA have a challenge educating potential investors on the debt buying environment today versus the debt buying environment of the past.  During the earnings call, Ken Vecchione, ECPG President and CEO commented: “For those of you who compare our US business now with how we performed in prior periods, we would be the first to admit that we are not currently generating returns in line with our peak years from 2010 to 2012. That world changed when a few large issuers left the US market and removed a substantial portion of supply.”

Later Vecchione reported: “I’m pleased to report that we are now seeing evidence of an inflection point in our invested capital returns. As we enter 2016, we expect higher returns on newly committed forward flows in the US. Today, we have commitments for over $270 million of capital deployment at returns that are 15% higher than our returns in 2015.”

One other interesting topic in the reporting was the use of the legal channel. This came up in two areas. First of all, the company reported that legal channel collections accounted for 43% of total collections and grew to $181 million in the fourth quarter compared to $160 million and 41% of collections a year ago.

Secondly, when discussing UK collections (through ECPG’s Cabot Credit Management subsidiary) the company reported that they had encountered an opportunity in the fourth quarter to reinvest some general cost savings back into Cabot’s legal collections practice.

In short, it seems to be clear that litigation will continue to be a significant portion of the company’s strategy going forward.

Finally, the discussion of recent forward flows and the divestiture of a company that was just acquired 3 years ago seems to be a clear message to the market that the company is focused on business that will generate higher returns.