European & US Debt Purchasers
- Understand how falling “in-force” portfolio net IRR is now dangerously close to firms’ locked in cost of debt
- Understand why lifetime cash generation on portfolios purchased in recent years is negative and that current year Adjusted EBITDA is highly misleading
- Understand why third party collections / servicing (3PC) business is broadly a zero margin, risky and potentially capital intensive business
- Understand how Estimated Remaining Collections (ERC) assumptions are near peak cycle and vulnerable to substantial negative revision (c. 39% in our proprietary ERC model if breakage and new payer rates revert to levels seen coming out of the last recession)
- Understand how value has been destroyed over the past 5 years through poor portfolio purchasing and debt-financed 3PC acquisitions yet enterprise values have gone up
- Understand why firms are unlikely to grow into their current valuations as the legacy of poor recent year portfolio purchasing impedes access to funding to be able to buy heavily on better economics in a downturn
- Estimation of in-force all-in net portfolio IRRs by firm (i.e. firms’ average IRRs after collection and central costs on portfolios currently owned) and projection thereof
- Estimation of lifetime cash generation on portfolios purchased in recent years
- Debunking of the Adjusted EBITDA and steady state free cash flow measures used for valuation and analysis in the sector as misleading
- Dissection of 3PC profitability for both the major credit management services firms as well as benchmarking against other pure and 3PC-heavy firms
- Estimation of portfolio and ERC revaluations firms have benefitted from in recent years and stress-testing ERC for reversion to breakage rates and new payer rates seen coming out of the last downturn
- Equity and debt valuations across 11 covered companies, both using DCF and a proprietary In-Force & New Business valuation model, each run through several scenarios – base, bull, stress, run-off and reverse-engineered to see what assumptions are needed to justify current valuations
- And much more!
- Do credit management services (CMS) firms really generate positive cash flow on a lifetime basis?
- Should we believe the bulls who see the industry as structurally growing with strong Adjusted EBITDA margins, strong barriers to entry and operational leverage that will allow firms to improve cash generation over time?
- Or should we believe the bears who believe firms’ cash flow to be structurally weak and valuations not reflective of this?
- How far have net IRRs really fallen and is debt purchasing a viable business on current purchasing economics?
- Is 3PC just a loss leader for firms to access better debt purchasing opportunities?
- How much has the price paid for equivalent portfolios risen since the financial crisis?
- Will firms buy back their bonds given increased yields relative to net IRRs on new debt purchasing opportunities?
- Do securitization carve-outs from debt incurrence covenants pose a material risk to senior secured bondholders?
- How reliable is the ERC figure? What assumptions are currently built in?
- And many more!
0. View, Variant Perception & Recommendations
1. Adj EBITDA Is Not A Useful Measure In Debt Purchasing
2. Equity & Debt Valuations
3. CMS Industry Downturn Dynamics
4. ERC Revaluations
5. 3PC Broadly Zero Margin Business
6. Operating Leverage
7. Debt Purchase Economics
8. Undiscounted Asset & Liability Cash Flows
9. Market Growth
10. Price Paid For Portfolios
11. Banking Lens
12. Securitization Carve-Outs
13. Stressed Liquidity
14. Miscellaneous Topics:
• Will firms buy back bonds?
• Digital opportunity to reduce costs
• M&A transaction valuations, current market valuation multiples, case for large-scale M&A & distressed M&A valuation
• Debt purchase accounting
• 1st Credit benign run-off case study
• Regulatory / legislative change outlook
• Debt / ERC is misleading
• Cross-border synergies
• 3PC cash segregation
• US debt purchase background
• Investing in debt purchasing anti-cyclically
• Industry competition analysis
• Better at collecting than banks
• Haircuts through payment plans
• Risks of secured portfolios
• Vendor financing
• ERC modelling and sensitivities
• Central costs