Last Thursday Encore Capital Group (ECPG) reported financial results for the quarter ending June 30, 2017, announcing net income of $20.3 million for the quarter, as compared to $29.6 million in the same period a year ago. ECPG is an international specialty finance company with operations in eight countries that provides debt recovery solutions for consumers across a broad range of assets. 

Highlights for Q2 2017

  • Investment in receivable portfolios was $246 million, including $132 million in the U.S., compared to $233 million deployed overall in the same period a year ago.
  • Gross collections grew 3% to $446 million, compared to $434 million in the same period of the prior year.
  • Total revenues were $291 million, compared to $289 million in the same period of the prior year.
  • Estimated Remaining Collections (ERC) grew $719 million compared to the same period of the prior year, to $6.26 billion.
  • Total operating expenses increased 6% to $210 million, compared to $198 million in the same period of the prior year, reflecting higher legal collections spending in the United States. Adjusted operating expenses increased 12% to $180 million, compared to $160 million in the same period of the prior year.
  • Available capacity under Encore’s domestic revolving credit facility, subject to borrowing base and applicable debt covenants, was $263 million as of June 30, 2017.

ECPG President and Chief Executive Officer Ashish Masih commented on the quarter:

“The second quarter for Encore was a period of solid financial and operational performance. The domestic debt market continues to grow in supply and provides for a favorable purchasing environment. Liquidation improvement initiatives are delivering sustained improved collections performance in the U.S. and in Europe over a wide array of vintages, allowing us to record better returns and increase expectations for future collections. Also in Europe, we had a strong quarter of portfolio purchasing and the IPO process for our subsidiary Cabot Credit Management remains on track.”

insideARM Perspective 

Whenever we write about quarterly earnings announcements for ECPG we note that ECPG and Portfolio Recovery Associates (PRAA) quarterly reporting provides an excellent overview of the debt-buying industry. We also suggest the reports should be viewed together.

(Editor’s note: PRAA is scheduled to report their second quarter earnings on Tuesday, August 8th. insideARM will report on that announcement shortly.) 

In yesterday earnings call, a few items stood out:

1) Domestic supply and pricing 

Masih stated:

“In the second quarter, the U.S. market continued to exhibit favorable purchasing dynamics. Recent financial results from large credit card issuers indicate that delinquency and net charge-off rates continue to rise, while loan loss provisions continue to build, suggesting a continuation of the increases in supply we have been reporting for the last several quarters. Pricing in the second quarter remained favorable and we continue to stay committed to our disciplined pricing strategy.”

insideARM suspects that PRAA will be singing from the same songbook on this issue next week.

2) CFPB Rulemaking

When commenting on Consumer Financial Protection Bureau rulemaking activities, Masih said:

“As you may remember, the CFPB issued its advance notice of proposed rulemaking back in November of 2013, to which Encore submitted comments. Although this process has taken a long time, the CFPB has now announced that it will take the next step by issuing the notice of proposed rulemaking in September. These rules which could become effective sometime in 2018 are expected to address debt collectors and debt buyers, communications practices as well as consumer disclosures. As we have said before, if you view the finalization of new rules for our industry to be a positive step for all market participants who are capable of and willing to invest in robust, compliant operations.”

Later during the Q&A session of the call another analyst was asking for additional follow-up on CFPB rulemaking and asked:

“…….is it your belief that once the rules do get implemented, it should improve your competitive positioning to the extent that third-party agencies and other buyers have effectively been a little bit advantaged relative to you because they haven't been playing by the same rules that you agreed to in the consent orders?

To which Masih replied:

“You're absolutely right, it should. I mean, it will raise the bar to the standards we've been adhering to for the last 2 years. And it will improve the industry, it will raise the standard for everyone. And they will need to start doing it well in advance. I mean, the specifics come out in a couple of months, so you're absolutely right.”

insideARM would suspect that many reputable ARM companies and smaller debt buyers would take offense to any subtle implication that somehow Encore and PRAA are the only companies in the space that are as compliant as they are today. Reputable ARM companies have reviewed and studied all CFPB activity and modified policies and procedures accordingly.

3) Large issuers that are not currently selling

During the earnings call, management was asked by one of the outside analysts to comment on any anticipated/potential change in behavior from the large issuers that are currently not selling accounts. Masih spoke for the Encore team:

“We have not seen any actual issuers come back to the market. We continue to have conversations with most players in the industry and we watch. We run our business as if they are not back. And the volumes have continued to grow in terms of the face amount available, in terms of dollars deployed over the last several years, and will continue to grow as the outstandings and the loss rates of the issuers who sell are growing, as you can see from their calls. So we run our business as if they are not coming back, but we are very well prepared in case they do. And we actually feel that over time, as loss rates will grow, their books are growing, they will see debt sales as another channel and tool to manage their losses. And over time, I expect that, that may happen. And when they come back, we are well positioned. As you heard from us in the past, we're able to expand capacity fairly rapidly across the globe and in a very cost-efficient manner as well, and that differentiates us from others. So when they do come back, we'll be able to react and respond to the market very, very quickly.”

insideARM believes that this is an issue with no definite answer today. Issuers that are not currently selling made the decision not to do so for reasons we are not privy to. We believe that Encore management responsibly answered this question.


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