Debt collectors face busy times

The company’s shares touched a COVID era low of $6.25, having traded above $37 before the late February market meltdown.

For sharemarket listed debt collectors, swelling unemployment and consumer and business stresses imply rosy fortunes.

But at some point the “blood from a stone” rule kicks in: delinquent loan books are only worth something if enough can be squeezed from the debtors to make the recovery worthwhile.

On the evidence to date, undisputed industry leader Credit Corp (CCP) has taken prudent steps to buttress itself from the anticipated consumer pain when the government support measures and “private sector forbearance” wears off.

As with most of its peers, Credit Corp’s primary activity involves buying books of bad debts (purchased debt ledgers, or PDLs) from parties such as banks or telcos.

Thanks to finely-honed analysis tools, management can accurately predict what percentage of the outstanding debt can be recouped.

But these are not usual times and debtors are behaving in a less predictable way.

As Credit Corp noted in its recent profit results, recalcitrant debtors went on a repayment strike in March – when the COVID-19 chaos started to unfold – and abandoned long term repayment plans.

But by June 30 repayments had returned to pre-COVID-19 levels, with an “uncharacteristically” high level of one-off repayments.

Having raised $155m of fresh equity in May via a placement and share purchase plan, Credit Corp has a $400m war chest to buy fresh PDLs – but “pricing will need to be adjusted to reflect expected poorer conditions.”

The company’s shares touched a COVID era low of $6.25, having traded above $37 before the late February market meltdown.

Now trading just below $20 apiece, Credit Corp shares are above their levels of mid June 2018,

Despite the vicissitudes, Credit Corp’s underlying earnings rose 13 per cent to $79.6m (pre the COVID adjustments).

Out of an abundance of caution the final dividend - worth 36c a share last time around – has been put on ice.

Such is Credit Corp’s analytical prowess that the board is comfortable guiding to current year earnings of $60-75m, with a full-year dividend of 45-55c a share.

With COVID-19 blighting Victoria and threatening to reappear elsewhere, that’s a prediction worthy of Nostradamus.

Tim Boreham edits The New Criterion

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