Credit Management APRIL 2019

credit

THE CICM MAGAZINE FOR CONSUMER AND COMMERCIAL CREDIT PROFESSIONALS

OPINION

AUTHOR – Lawrie Holmes

financial buffers, and regulators putting in

tougher affordability tests resulting in more

regular occurring payments has seen the

sector having more headroom when it comes

to risk. That will be hugely valuable if there’s

another squeeze on disposable income if the

UK economy slows, an important consideration

going into Brexit.

FUTURE PROSPECTS

How are the main players placed? In February

Arrow Global revealed underlying profit after

tax rose 13.3 percent to £64.1 million for full

year 2018 results and that secured net debt

to adjusted EBITDA had fallen slightly from

3.9x to 3.7x. CEO Lee Rochford said the group

was operating at the top of the credit cycle

and added: “As we look to the year ahead, we

are mindful of volatile market conditions and

pockets of high competition.” On the share price

of 180p, the response from analysts was mostly

positive. JP Morgan Cazenove gave a target price

of 460p, Numis called 495p and Jeffries went as

high as 534p, although Goldman Sachs notably

reduced its target from 300p to 220p.

Encore’s revenues, adjusted by net allowances

and allowance reversals, were a record $1.36

billion, up 15 percent compared to $1.19 billion

in 2017. Total operating expenses were $957

million, compared to $862 million in 2017. It’s

not possible to strip out Cabot’s performance

before being acquired last May, but its EBITDA

in the three months to March 2018, was £79.6

million, up 18 percent from the same period the

previous year.

“Encore has similar challenges to Arrow

Global in that valuation is relatively depressed.

PRA, another American business that has a

sizeable European operation, is actually much

less leveraged than the other operators for a not

much higher valuation,” says Greenwood.

Lowell, the Anglo-German debt collector,

said third quarter 2018 cash EBITDA had

increased ten percent to £422 million. Its CEO

James Cornell said last November: “We seek

growth that increases scale and diversification,

while remaining mindful of leverage.”

Intrum Justitia, which has a sizeable UK

presence after acquiring First Credit a year ago,

reported adjusted operating profit (EBIT) up by

23 percent. “Together with the solid results from

the first nine months of the year, this gives us

an impressive platform for 2019, during which

we will increase the pace towards our targets for

2020,” said Mikael Ericson, President and CEO

in January.

“In 2019, we will have a strong focus on

centralisation, standardisation and cost

efficiency in our collection activities. We expect

to normalize our rate of investment during

the year and extract significant value from the

large investments we have made in 2018. At the

same time, we see an active market with stable

returns across Europe where our size and strong

cashflow gives us flexibility to invest, when the

Lawrie Holmes

“As we look to the

year ahead, we

are mindful of

volatile market

conditions and

pockets of high

competition.”

“We seek growth

that increases

scale and

diversification,

while remaining

mindful of

leverage.”

opportunity is right, and continue to grow”,

added Ericson.

Hoist Finance, an unusual beast in the sector

in that it has a banking licence, has come under

pressure recently because banking regulators

have changed capital requirements against nonperforming

loans, says Greenwood. “They have

to hold more capital, so that’s been a problem

for them recently,” he says.

The problem with the calculations and

analysis of the industry is that they are done

with some degree of subjectivity in that these are

highly leveraged businesses, says Greenwood.

“It works both ways. If you’re very bearish you

can spin a story that they generate no cash, it

gives the short sellers some ammunition to

criticise the calculations the companies make

themselves.

“What’s true about these companies is if they

were to turn the taps off on investment, they’d

have a hell of a lot of cash. The basic issue for

them is that they’re consuming the cash buying

new portfolios. I would note that Arrow recently

upped its guidance for portfolio acquisitions, it

bought more than it guided to last year and its

upped its guidance this year.

“If you were concerned about cashflow that’s

not the sort of behaviour I would expect to be

pursuing, especially when they’ve got a target of

reducing financial gearing. I think their (short

sellers) argument around the debt purchases

has always been disproved by Arrow, so they’ve

morphed their argument into different areas.

The hedge funds that have shorted these stocks

have done very well out of it so far, but I think

their case is starting to run out of mileage,” he

adds.

Lawrie Holmes is a freelance journalist who

regularly contributes to the Financial Times,

Sunday Telegraph, Mail on Sunday, CFO Europe

and Accountancy Age.

The Recognised Standard / www.cicm.com / April 2019 / PAGE 31

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