Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share
ECPG
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)
June 30, 2023
December 31, 2022
Assets
Cash and cash equivalents
$
184,871
$
143,912
Investment in receivable portfolios, net
3,330,986
3,088,261
Property and equipment, net
107,218
113,900
Other assets
401,299
341,073
Goodwill
852,196
821,214
Total assets
$
4,876,570
$
4,508,360
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities
$
203,050
$
198,217
Borrowings
3,203,425
2,898,821
Other liabilities
236,260
231,695
Total liabilities
3,642,735
3,328,733
Commitments and Contingencies (Note 11)
Equity:
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding
—
—
Common stock, $0.01 par value, 75,000 shares authorized, 23,485 and 23,323 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively
235
233
Additional paid-in capital
3,906
—
Accumulated earnings
1,300,594
1,278,210
Accumulated other comprehensive loss
(70,900)
(98,816)
Total stockholders’ equity
1,233,835
1,179,627
Total liabilities and stockholders’ equity
$
4,876,570
$
4,508,360
The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the condensed consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See “Note 8: Variable Interest Entities” for additional information on the Company’s VIEs.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans in Europe.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates (collectively, “Cabot”), the Company is one of the largest credit management services providers in Europe and the United Kingdom. These are the Company’s primary operations.
The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as “LAAP.”
Financial Statement Preparation and Presentation
The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the Company’s condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s condensed financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements have been prepared in conformity with GAAP and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates variable interest entities (“VIEs”) for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 8: Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in consolidation.
Translation of Foreign Currencies
The condensed financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Translation gains or losses are the material components of accumulated other comprehensive income or loss and are reclassified to earnings upon the substantial sale or liquidation of investments in foreign operations.
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three and six months ended June 30, 2023, as compared to the recent accounting pronouncements described in our Annual Report, that have significance, or potential significance, to the Company’s condensed consolidated financial statements.
Note 2: Earnings Per Share
Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock-based awards, and the dilutive effect of the convertible and exchangeable senior notes, if applicable.
On August 12, 2015, the Company’s Board of Directors approved a $50.0 million share repurchase program. On May 5, 2021, the Company announced that the Board of Directors had approved an increase in the size of the repurchase program from $50.0 million to $300.0 million (an increase of $250.0 million). Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the Company’s management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. During the three and six months ended June 30, 2023, the Company did not make any repurchases under the share repurchase program. During the three and six months ended June 30, 2022, the Company repurchased 424,091 and 823,613 shares of its common stock for approximately $25.1 million and $50.7 million, respectively. The Company’s practice is to retire the shares repurchased.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands, except per share amounts):
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Net income
$
26,305
$
60,439
$
44,931
$
236,188
Total weighted-average basic shares outstanding
23,670
24,359
23,610
24,539
Dilutive effect of stock-based awards
117
256
204
398
Dilutive effect of convertible and exchangeable senior notes
493
1,796
797
2,008
Total weighted-average dilutive shares outstanding
24,280
26,411
24,611
26,945
Basic earnings per share
$
1.11
$
2.48
$
1.90
$
9.63
Diluted earnings per share
$
1.08
$
2.29
$
1.83
$
8.77
There were no anti-dilutive employee stock options outstanding during the three and six months ended June 30, 2023 and 2022.
Note 3: Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
•Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements as of June 30, 2023
Level 1
Level 2
Level 3
Total
Assets
Interest rate cap contracts
$
—
$
34,957
$
—
$
34,957
Liabilities
Cross-currency swap agreements
—
(33,819)
—
(33,819)
Fair Value Measurements as of December 31, 2022
Level 1
Level 2
Level 3
Total
Assets
Interest rate cap contracts
$
—
$
36,807
$
—
$
36,807
Liabilities
Cross-currency swap agreements
—
(36,918)
—
(36,918)
Derivative Contracts:
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Non-Recurring Fair Value Measurement:
Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined at the time of initial recognition and in each reporting period using Level 3 measurements based on appraised values using market comparables. The fair value estimate of the assets held for sale was approximately $82.2 million and $68.2 million as of June 30, 2023 and December 31, 2022, respectively.
Financial Instruments Not Required To Be Carried At Fair Value
The table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts in the following table are included in the condensed consolidated statements of financial condition as of June 30, 2023 and December 31, 2022 (in thousands):
June 30, 2023
December 31, 2022
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
Financial Assets
Investment in receivable portfolios, net
$
3,330,986
$
3,426,757
$
3,088,261
$
3,242,506
Financial Liabilities
Global senior secured revolving credit facility
850,689
850,689
661,738
661,738
Encore private placement notes
48,850
48,000
68,390
66,947
Senior secured notes(1)
1,527,085
1,375,574
1,480,258
1,334,686
Exchangeable senior notes due September 2023
17,655
19,690
172,500
205,227
Convertible senior notes due October 2025
100,000
131,878
100,000
130,556
Convertible senior notes due March 2029
230,000
225,188
—
—
Cabot securitisation senior facility
443,828
443,828
423,522
423,522
Other borrowings
18,633
18,633
23,512
23,512
_______________________
(1)Carrying amount represents historical cost, adjusted for any related debt discount or debt premium.
The fair value of investment in receivable portfolios is measured using Level 3 inputs by discounting the estimated future cash flows generated by the Company’s proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
Borrowings:
The Company’s convertible notes, exchangeable notes, senior secured notes and private placement notes are carried at historical cost, adjusted for the applicable debt discount. The fair value estimate for the convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs. The fair value of the senior secured notes and private placement notes is estimated using widely accepted valuation techniques, including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates.
The carrying value of the Company’s senior secured revolving credit facility and securitisation senior facility approximates fair value due to the use of current market rates that are repriced frequently.
Note 4: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment.
The following table summarizes the fair value of derivative instruments as recorded in the Company’s condensed consolidated statements of financial condition (in thousands):
June 30, 2023
December 31, 2022
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate cap contracts
Other assets
$
34,957
Other assets
$
36,807
Cross-currency swap agreements
Other liabilities
(33,819)
Other liabilities
(36,918)
Derivatives Designated as Hedging Instruments
The Company uses interest rate cap contracts to manage its risk related to the interest rate fluctuations in its variable interest rate bearing debt. As of June 30, 2023, the Company held two interest rate cap contracts with a notional amount of approximately $880.2 million. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a notional amount of €400.0 million (approximately $436.4 million based on an exchange rate of $1.00 to €0.92, the exchange rate as of June 30, 2023) and matures in June 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) bearing debt (“2021 Cap”) has a notional amount of £350.0 million (approximately $443.8 million based on an exchange rate of $1.00 to £0.79, the exchange rate as of June 30, 2023) and matures in September 2024. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2021 Cap as cash flow hedge instruments. The Company expects to reclassify approximately $29.6 million of net derivative gain from accumulated other comprehensive loss into earnings relating to interest rate caps within the next 12 months.
The Company uses cross-currency swap agreements to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt. Prior to June 2023, the Company held cross-currency swap agreements with a total notional amount of €350.0 million (approximately $381.9 million based on an exchange rate of $1.00 to €0.92, the exchange rate as of June 30, 2023). These cross-currency swaps were set to expire in October 2023 and were designated as cash flow hedges. In June 2023, the Company amended the cross-currency swap agreements and extended the expiration date of these agreements to October 2025 without changing the total notional amount. In connection with these transactions, the Company de-designated the previous cash flow hedge relationships and re-designated the amended cross-currency swap agreements as fair value hedges. The amended cross-currency swap agreements are considered off-market derivatives. The Company will amortize the unrealized net derivative gain included in accumulated other comprehensive loss associated with the previously designated cash flow hedges of approximately $0.9 million into earnings through October 2023. Additionally, the unrealized loss associated with the amended cross-currency
swap agreements was approximately $1.1 million as of June 30, 2023. The hedged liabilities are included in Borrowings in the Company’s condensed consolidated statements of financial condition as of June 30, 2023 and had a carrying amount of €350.0 million (approximately $381.9 million based on an exchange rate of $1.00 to €0.92, the exchange rate as of June 30, 2023).
The following tables summarize the effects of derivatives designated as hedging instruments in the Company’s condensed consolidated financial statements (in thousands):
Derivatives Designated as Hedging Instruments
Gain (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from OCI into Income (Loss)
Gain (Loss) Reclassified from OCI into Income (Loss)
Three Months Ended June 30,
Three Months Ended June 30,
2023
2022
2023
2022
Interest rate cap contracts
$
3,423
$
6,587
Interest expense
$
(391)
$
(183)
Cross-currency swap agreements
(1,896)
(22,435)
Interest expense
(1,395)
(2,136)
Other income (expense)
1,351
(20,376)
Derivatives Designated as Hedging Instruments
Gain (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from OCI into Income (Loss)
Gain (Loss) Reclassified from OCI into Income (Loss)
Six Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Interest rate cap contracts
$
(3,501)
$
16,350
Interest expense
$
(841)
$
(353)
Cross-currency swap agreements
170
(28,839)
Interest expense
(2,903)
(3,723)
Other income (expense)
6,504
(30,852)
In July 2023, the Company entered into three cross-currency swap agreements with a total notional amount of £300.0 million that are used to manage foreign currency exchange risk by converting fixed-rate GBP-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt.
Note 5: Investment in Receivable Portfolios, Net
The Company’s purchased portfolios of loans are grossed-up to their face value with an offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables immediately after purchasing the portfolio. The Company then records a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which ultimately equals the amount paid for a portfolio purchase and presented as “Investment in receivable portfolios, net” in the Company’s condensed consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.
Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change, which is not expected due to the delinquent nature of the individual loans. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.
Revenue is recognized for each static pool over the economic life of the pool. Debt purchasing revenue includes two components:
(1) Revenue from receivable portfolios, which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR) and also includes all revenue from zero basis portfolio (“ZBA”) collections, and
(a) Recoveries above or below forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period; and
(b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e. amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases).
The Company measures expected future recoveries based on historical experience, current conditions, reasonable and supportable forecasts, and other quantitative and qualitative factors. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of the Company’s collection staff. External factors include new laws or regulations, new interpretations of existing laws or regulations, and macroeconomic conditions. The Company continues to reassess its expected future recoveries in each reporting period.
Investment in receivable portfolios, net consists of the following as of the dates presented (in thousands):
June 30, 2023
December 31, 2022
Amortized cost
$
—
$
—
Negative allowance for expected recoveries
3,330,986
3,088,261
Balance, end of period
$
3,330,986
$
3,088,261
The following table summarizes the changes in the balance of investment in receivable portfolios, net during the periods presented (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Balance, beginning of period
$
3,214,792
$
3,137,386
$
3,088,261
$
3,065,553
Negative allowance for expected recoveries - current period purchases(1)
274,325
173,007
550,756
342,512
Collections applied to investment in receivable portfolios, net (2)
(175,338)
(191,429)
(342,020)
(406,738)
Changes in recoveries (3)
(3,486)
25,150
(12,987)
192,373
Put-backs and Recalls
(4,229)
(1,373)
(6,035)
(4,580)
Disposals and transfers to real estate owned
(5,139)
(1,856)
(6,244)
(3,832)
Foreign currency translation adjustments
30,061
(105,762)
59,255
(150,165)
Balance, end of period
$
3,330,986
$
3,035,123
$
3,330,986
$
3,035,123
_______________________
(1)The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented:
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Purchase price
$
274,325
$
173,007
$
550,756
$
342,512
Allowance for credit losses
690,501
768,932
1,350,145
1,119,118
Amortized cost
964,826
941,939
1,900,901
1,461,630
Noncredit discount
1,049,233
907,249
2,054,454
1,564,307
Face value
2,014,059
1,849,188
3,955,355
3,025,937
Write-off of amortized cost
(964,826)
(941,939)
(1,900,901)
(1,461,630)
Write-off of noncredit discount
(1,049,233)
(907,249)
(2,054,454)
(1,564,307)
Negative allowance
274,325
173,007
550,756
342,512
Negative allowance for expected recoveries - current period purchases
(2)Collections applied to investment in receivable portfolios, net, is calculated as follows during the periods presented:
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Cash Collections
$
476,522
$
497,711
$
938,878
$
1,017,125
Less - amounts classified to revenue from receivable portfolios
(301,184)
(306,282)
(596,858)
(610,387)
Collections applied to investment in receivable portfolios, net
$
175,338
$
191,429
$
342,020
$
406,738
(3)Changes in recoveries is calculated as follows during the periods presented, where recoveries include cash collections, put-backs and recalls, and other cash-based adjustments:
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Recoveries (below) above forecast
$
(477)
$
9,935
$
(15,835)
$
56,287
Changes in expected future recoveries
(3,009)
15,215
2,848
136,086
Changes in recoveries
$
(3,486)
$
25,150
$
(12,987)
$
192,373
Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. Collections during the three months ended June 30, 2023, were below forecast by $0.5 million. Collections during the six months ended June 30, 2023 under-performed the forecasted collections by approximately $15.8 million. The under-performance was primarily attributable to shifts in the timing of collections for recent U.S. vintages as consumers transitioned back to more normalized payment behavior. The under-performance during the six months ended June 30, 2023, was also partly due to court closures in Spain resulting from labor unrest in the court system during the first quarter of 2023.
When reassessing the forecasts of expected lifetime recoveries during the three months ended June 30, 2023, management considered, among other factors, historical and current collection performance, changes in consumer behavior, and the macroeconomic environment and believes that forecasted collections for certain static pools resulted in decreased total expected recoveries. As a result, the Company has updated its forecast, resulting in changes in the timing and amount of total estimated remaining collections which in turn, when discounted to present value, resulted in a net negative change in expected future recoveries of approximately $3.0 million for the three months ended June 30, 2023. This negative change in expected future recoveries, together with the positive changes recorded in the first quarter, resulted in a net positive change of expected future recoveries of $2.8 million for the six months ended June 30, 2023. During the three and six months ended June 30, 2022, the Company recorded approximately $15.2 million and $136.1 million, respectively, in net positive change in expected future period recoveries as a result of reforecasting its expected future recoveries based on the COVID-19 pandemic-related consumer behavior observed at that time.
Note 6: Other Assets
Other assets consist of the following (in thousands):
The Company is in compliance in all material respects with all covenants under its financing arrangements as of June 30, 2023. The components of the Company’s consolidated borrowings were as follows (in thousands):
June 30, 2023
December 31, 2022
Global senior secured revolving credit facility
$
850,689
$
661,738
Encore private placement notes
48,850
68,390
Senior secured notes
1,532,098
1,485,888
Convertible notes and exchangeable notes
347,655
272,500
Cabot securitisation senior facility
443,828
423,522
Other
18,633
23,512
Finance lease liabilities
3,930
5,675
3,245,683
2,941,225
Less: debt discount and issuance costs, net of amortization
(42,258)
(42,404)
Total
$
3,203,425
$
2,898,821
Encore is the parent of the restricted group for the Global Senior Facility, the Senior Secured Notes and the Encore Private Placement Notes, each of which is guaranteed by the same group of material Encore subsidiaries and secured by the same collateral, which represents substantially all of the assets of those subsidiaries.
Global Senior Secured Revolving Credit Facility
In September 2020, the Company entered into a multi-currency senior secured revolving credit facility agreement (as amended and restated, the “Global Senior Facility”). In May 2023, the Company amended the Global Senior Facility to extend the termination date of the facility from September 2026 to September 2027. In addition, the size of the facility was increased by $40.0 million to $1,180.0 million. As of June 30, 2023, the Global Senior Facility provided for a total committed facility of $1,180.0 million that matures in September 2027 and includes the following key provisions:
•Interest at Term SOFR (or EURIBOR for any loan drawn in Euro or a rate based on SONIA for any loan drawn in British Pound), with a Term SOFR (or EURIBOR or SONIA) floor of 0.00%, plus a margin of 2.50%, plus in the case of Term SOFR borrowings, a credit adjustment spread of 0.10%;
•An unused commitment fee of 0.40% per annum, payable quarterly in arrears;
•A restrictive covenant that limits the LTV Ratio (defined in the Global Senior Facility) to 0.75 in the event that the Global Senior Facility is more than 20% utilized;
•A restrictive covenant that limits the SSRCF LTV Ratio (defined in the Global Senior Facility) to 0.275;
•A restrictive covenant that requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Global Senior Facility) of at least 2.0;
•Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and
•Standard events of default which, upon occurrence, may permit the lenders to terminate the Global Senior Facility and declare all amounts outstanding to be immediately due and payable.
The Global Senior Facility is secured by substantially all of the assets of the Company and the guarantors. Pursuant to the terms of an intercreditor agreement entered into with respect to the relative positions of (1) the Global Senior Facility, any super priority hedging liabilities and the Encore Private Placement Notes (collectively, “Super Senior Liabilities”) and (2) the Senior Secured Notes, Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
As of June 30, 2023, the outstanding borrowings under the Global Senior Facility were $850.7 million. The weighted average interest rate of the Global Senior Facility was 7.51% and 3.32% for the three months ended June 30, 2023 and 2022, respectively. The weighted average interest rate of the Global Senior Facility was 7.30% and 3.08% for the six months ended June 30, 2023 and 2022, respectively. Available capacity under the Global Senior Facility, after taking into account applicable debt covenants, was approximately $310.5 million as of June 30, 2023.
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Encore Private Placement Notes”). As of June 30, 2023, $48.9 million of the Encore Private Placement Notes remained outstanding. The Encore Private Placement Notes bear an annual interest rate of 5.625%, mature in August 2024 and require quarterly principal payments of $9.8 million. The covenants and material terms for the Encore Private Placement Notes are substantially similar to those for the Global Senior Facility.
Senior Secured Notes
The following table provides a summary of the Company’s senior secured notes (the “Senior Secured Notes”) ($ in thousands):
June 30, 2023
December 31, 2022
Issue Currency
Maturity Date
Interest Payment Dates
Interest Rate
Encore 2025 Notes
$
381,868
$
375,325
EUR
Oct 15, 2025
Apr 15, Oct 15
4.875
%
Encore 2026 Notes
380,424
363,019
GBP
Feb 15, 2026
Feb 15, Aug 15
5.375
%
Encore 2028 Notes
317,020
302,516
GBP
Jun 1, 2028
Jun 1, Dec 1
4.250
%
Encore 2028 Floating Rate Notes
452,786
445,028
EUR
Jan 15, 2028
Jan 15, Apr 15, Jul 15, Oct 15
EURIBOR +4.250%(1)
$
1,532,098
$
1,485,888
_______________________
(1)Interest rate is based on three-month EURIBOR (subject to a 0% floor) plus 4.250% per annum, resets quarterly.
The Senior Secured Notes are secured by the same collateral as the Global Senior Facility and the Encore Private Placement Notes. The guarantees provided in respect of the Senior Secured Notes are pari passu with each such guarantee given in respect of the Global Senior Facility and Encore Private Placement Notes. Subject to the intercreditor agreement described above under the section “Global Senior Secured Revolving Credit Facility,” Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
Convertible Notes and Exchangeable Notes
The following table provides a summary of the principal balance, maturity date and interest rate for the Company’s convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ($ in thousands):
June 30, 2023
December 31, 2022
Maturity Date
Interest Payment Dates
Interest Rate
2023 Exchangeable Notes
$
17,655
$
172,500
Sep 1, 2023
Mar 1, Sep 1
4.500
%
2025 Convertible Notes
100,000
100,000
Oct 1, 2025
Apr 1, Oct 1
3.250
%
2029 Convertible Notes
230,000
—
Mar 15, 2029
Mar 15, Sep 15
4.000
%
$
347,655
$
272,500
In March 2023, Encore issued $230.0 million aggregate principal amount of 4.00% convertible senior notes that mature on March 15, 2029 in a private placement transaction (the “2029 Convertible Notes”). Interest on the 2029 Convertible Notes is payable semi-annually.
The Company used a portion of the net proceeds from the issuance of the 2029 Convertible Notes to repurchase, in separate privately negotiated transactions, approximately $154.8 million aggregate principal amount of its 2023 Exchangeable Notes for approximately $192.5 million. The repurchase met the criteria for an induced conversion and accordingly, the Company recognized expense of $2.7 million, representing the fair value of the consideration paid to certain holders of the 2023 Exchangeable Notes in excess of the fair value which they were otherwise entitled to receive pursuant to the existing conversion terms on the respective settlement dates. The amount is included in Other income, net, in the Company’s condensed consolidated statements of income during the six months ended June 30, 2023. The remaining excess above the principal amount of the repurchased 2023 Exchangeable Notes was recognized in the Company’s stockholder’s equity.
Additionally, in March 2023, the Company received proceeds of approximately $28.5 million from the unwind of the capped call options associated with the repurchased portion of the 2023 Exchangeable Notes. Since the capped call options were determined to be equity instruments, the partial unwind of the capped call options was recorded as an increase in
stockholder’s equity in the condensed consolidated statements of financial condition as of June 30, 2023. In addition, the Company recognized approximately $0.7 million of interest expense in the condensed consolidated statements of income during the six months ended June 30, 2023 to record the write-off of unamortized debt issuance costs associated with the 2023 Exchangeable Notes repurchased.
The 2023 Exchangeable Notes were issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned finance subsidiary of Encore, and are fully and unconditionally guaranteed by Encore. Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by Encore Finance. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent to April 30, 2018, the date of incorporation of Encore Finance.
In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be required to make in the event that the market price of the Company’s common stock becomes greater than the conversion or exchange prices of the Convertible Notes and the Exchangeable Notes, the Company may enter into hedge programs that increase the effective conversion or exchange price for the Convertible Notes and the Exchangeable Notes. In connection with the issuance of the 2029 Convertible Notes, the Company entered into privately negotiated capped call transactions that effectively raised the conversion price of the 2029 Convertible Notes from $65.89 to $82.69. The cost of the capped call transactions was approximately $18.5 million. This cost, net of tax effect, was included as a reduction to stockholder’s equity in the condensed consolidated statements of financial condition as of June 30, 2023. As of June 30, 2023, the Company had two hedge programs that increase the effective exchange price for the 2029 Convertible Notes and the 2023 Exchangeable Notes. The hedge instruments have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification. The Company recorded the cost of the hedge instruments as a reduction in stockholder’s equity, and does not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements. The Company did not hedge the 2025 Convertible Notes.
Certain key terms related to the convertible and exchangeable features as of June 30, 2023 are listed below ($ in thousands, except conversion or exchange price):
2023 Exchangeable Notes
2025 Convertible Notes
2029 Convertible Notes
Initial conversion or exchange price
$
44.62
$
40.00
$
65.89
Closing stock price at date of issuance
$
36.45
$
32.00
$
51.68
Closing stock price date
Jul 20, 2018
Sep 4, 2019
Feb 28, 2023
Initial conversion or exchange rate (shares per $1,000 principal amount)
22.4090
25.0000
15.1763
Adjusted conversion or exchange rate (shares per $1,000 principal amount)(1)
22.5264
25.1310
15.1763
Adjusted conversion or exchange price(1)
$
44.39
$
39.79
$
65.89
Adjusted effective conversion or exchange price(2)
$
62.13
$
39.79
$
82.69
Excess of if-converted value compared to principal(3)
$
1,681
$
22,187
$
—
Conversion or exchange date
Mar 1, 2023
Jul 1, 2025
Dec 15, 2028
_______________________
(1)Pursuant to the indentures for the Company’s 2025 Convertible Notes and 2023 Exchangeable Notes, the conversion and exchange rates were adjusted upon the completion of the Company’s tender offer in December 2021.
(2)As discussed above, the Company maintains a hedge program that increases the effective exchange price for the 2023 Exchangeable Notes to $62.13 and the 2029 Convertible Notes to $82.69.
(3)Represents the premium the Company would have to pay assuming the Convertible Notes and Exchangeable Notes were converted or exchanged on June 30, 2023 using a hypothetical share price based on the closing stock price on June 30, 2023. The premium of the 2023 Exchangeable Notes would have been reduced to zero with the existing hedge program.
In February 2023, in accordance with the indenture for the 2023 Exchangeable Notes, Encore Finance irrevocably elected “combination settlement” with a specified dollar amount equal to $1,800 per $1,000 principal amount of the 2023 Exchangeable Notes for all exchanges of the 2023 Exchangeable Notes that occur on or after March 1, 2023, the free exchange date, which effectively will result in an all cash settlement for the 2023 Exchangeable Notes so long as the stock price does not exceed $79.91 at any time during a 40-day observation period beginning on the 41st scheduled trading day immediately preceding the maturity date. None of the 2023 Exchangeable Notes have been exchanged.
In the event of conversion, the Convertible Notes are convertible into cash up to the aggregate principal amount of the notes and the excess conversion premium, if any, may be settled in cash or shares of the Company’s common stock at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes.
Interest expense related to the Convertible Notes and Exchangeable Notes was $3.3 million and $2.8 million during the three months ended June 30, 2023 and 2022, respectively. Interest expense related to the Convertible Notes and Exchangeable Notes was $6.2 million and $6.5 million during the six months ended June 30, 2023 and 2022, respectively.
Cabot Securitisation Senior Facility
Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, has a senior facility for a committed amount of £350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior Facility matures in September 2026. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum equal to SONIA plus a margin of 3.00% plus, for periods after September 18, 2024, a step-up margin ranging from zero to 1.00%.
As of June 30, 2023, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million (approximately $443.8 million based on an exchange rate of $1.00 to £0.79, the exchange rate as of June 30, 2023). The obligations of Cabot Securitisation under the Cabot Securitisation Senior Facility are secured by first ranking security interests over all of Cabot Securitisation’s property, assets and rights. As of June 30, 2023, this included receivables purchased from Cabot Financial UK from time to time, the book value of which was approximately £362.0 million (approximately $459.0 million based on an exchange rate of $1.00 to £0.79, the exchange rate as of June 30, 2023). As discussed in Note 4, “Derivatives and Hedging Instruments,” the Company uses interest rate cap contracts to manage its risk related to the interest rate fluctuations in its variable interest rate bearing debt. The weighted average interest rate of the Cabot Securitisation Senior Facility including the effect of the hedging instruments was 5.25% and 3.95% for the three months ended June 30, 2023 and 2022, respectively, and 5.25% and 3.70% for the six months ended June 30, 2023 and 2022, respectively.
Cabot Securitisation is a securitized financing vehicle and is a VIE for consolidation purposes. Refer to “Note 8: Variable Interest Entities” for further details.
Note 8: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive residual returns from the entity that could potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary.
As of June 30, 2023, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs including the ability to exercise discretion in the servicing of the financial assets and has the right to receive residual returns that could potentially be significant to the VIEs. The Company’s exposure to loss is limited to the total of the carrying value of the VIEs. The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.
Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the VIE.
A summary of the Company’s changes in accumulated other comprehensive loss by component is presented below (in thousands):
Three Months Ended June 30, 2023
Derivatives
Currency Translation Adjustments
Accumulated Other Comprehensive Loss
Balance at beginning of period
$
29,317
$
(119,685)
$
(90,368)
Other comprehensive income before reclassification
1,527
17,532
19,059
Reclassification
435
—
435
Tax effect
253
(279)
(26)
Balance at end of period
$
31,532
$
(102,432)
$
(70,900)
Three Months Ended June 30, 2022
Derivatives
Currency Translation Adjustments
Accumulated Other Comprehensive Loss
Balance at beginning of period
$
12,410
$
(76,318)
$
(63,908)
Other comprehensive loss before reclassification
(15,848)
(59,805)
(75,653)
Reclassification
22,695
—
22,695
Tax effect
(1,711)
—
(1,711)
Balance at end of period
$
17,546
$
(136,123)
$
(118,577)
Six Months Ended June 30, 2023
Derivatives
Currency Translation Adjustments
Accumulated Other Comprehensive Loss
Balance at beginning of period
$
36,494
$
(135,310)
$
(98,816)
Other comprehensive (loss) income before reclassification
(3,331)
33,540
30,209
Reclassification
(2,760)
—
(2,760)
Tax effect
1,129
(662)
467
Balance at end of period
$
31,532
$
(102,432)
$
(70,900)
Six Months Ended June 30, 2022
Derivatives
Currency Translation Adjustments
Accumulated Other Comprehensive Loss
Balance at beginning of period
$
516
$
(54,064)
$
(53,548)
Other comprehensive loss before reclassification
(12,489)
(82,059)
(94,548)
Reclassification
34,928
—
34,928
Tax effect
(5,409)
—
(5,409)
Balance at end of period
$
17,546
$
(136,123)
$
(118,577)
Note 10: Income Taxes
The Company’s effective tax rate for the three and six months ended June 30, 2023 was 27.6% and 26.8%, respectively. For the three and six months ended June 30, 2022, the Company’s effective tax rate was 27.8% and 24.9%, respectively. For the three months ended June 30, 2023 the difference between the effective tax rate and the federal statutory rate was primarily due to state income taxes and a foreign adjustment. For the six months ended June 30, 2023, the difference between the effective tax rate and the federal statutory rate was primarily due to state income taxes, an accrual related to state tax filing positions and other foreign adjustments. For the three and six months ended June 30, 2022, the difference between the effective tax rate and the federal statutory rate was primarily due to the proportion of income earned in higher tax rate jurisdictions compared to lower tax rate jurisdictions.
Each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective income tax rate. The estimated annual effective tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected amounts for the year. Since the Company operates in foreign countries with varying tax rates, the Company's quarterly effective tax rate is dependent on the level of income or loss from international operations in the reporting period.
The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026. The impact of the tax holiday in Costa Rica for the three and six months ended June 30, 2023 and 2022, was immaterial.
The Company is subject to income taxes in the U.S. and foreign jurisdictions. Significant judgement is required in evaluating uncertain tax positions and determining the provision for income taxes. During the six months ended June 30, 2023, the Company accrued $2.5 million related to state tax filing positions.
Note 11: Commitments and Contingencies
Litigation and Regulatory
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions asserting various claims, including those based on the Fair Debt Collection Practices Act (“FDCPA”), the Fair Credit Reporting Act (“FCRA”), the Telephone Consumer Protection Act (“TCPA”), comparable state statutes, state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.
As of June 30, 2023, there were no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 or any new material legal proceedings during the three and six months ended June 30, 2023.
In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. The Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when additional information becomes available. The Company’s legal costs are recorded to expense as incurred. As of June 30, 2023, the Company has no material reserves for legal matters.
Purchase Commitments
In the normal course of business, the Company enters into forward flow purchase agreements. A forward flow purchase agreement is a commitment to purchase receivables over a duration that is typically three to twelve months, but can be longer, generally with a specifically defined volume range, frequency, and pricing. Typically, these forward flow contracts have provisions that allow for early termination or price re-negotiation should the underlying quality of the portfolio deteriorate over time or if any particular month’s delivery is materially different than the original portfolio used to price the forward flow contract. Certain of these forward flow purchase agreements may also have termination clauses, whereby the agreements can be canceled by either party upon providing a certain specified amount of notice.
As of June 30, 2023, the Company had entered into forward flow purchase agreements for the purchase of nonperforming loans with an estimated minimum aggregate purchase price of approximately $393.0 million. The Company expects actual purchases under these forward flow purchase agreements to be significantly greater than the estimated minimum aggregate purchase price.
The Company conducts business through several operating segments. The Company’s Chief Operating Decision Maker relies on internal management reporting processes that provide segment revenue, segment operating income, and segment asset information in order to make financial decisions and allocate resources. The Company determined its operating segments meet the aggregation criteria, and therefore, it has one reportable segment, portfolio purchasing and recovery, based on similarities among the operating units including economic characteristics, the nature of the services, the nature of the production process, customer types for their services, the methods used to provide their services and the nature of the regulatory environment.
The following table presents information about geographic areas in which the Company operates (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Total revenues:
United States
$
206,765
$
241,344
$
406,983
$
614,918
Europe
United Kingdom
75,223
86,150
153,208
176,371
Other European countries(1)
41,056
29,321
75,294
65,132
Total Europe
116,279
115,471
228,502
241,503
Other geographies(1)
—
102
189
178
Total
$
323,044
$
356,917
$
635,674
$
856,599
________________________
(1)None of these countries comprise greater than 10% of the Company's consolidated revenues.
Note 13: Goodwill and Identifiable Intangible Assets
The Company’s goodwill is tested for impairment at the reporting unit level annually and in interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions.
The annual goodwill testing date for the reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st. There have been no events or circumstances during the three and six months ended June 30, 2023, that have required the Company to perform an interim assessment of goodwill carried at these reporting units. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and intangible assets. Adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.
The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The following table summarizes the activity in the Company’s goodwill balance (in thousands):
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in our Annual Report on Form 10-K under “Part I, Item 1A—Risk Factors” could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.
Our Business
We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans in Europe.
Encore Capital Group, Inc. (“Encore”) has three business units: MCM, which consists of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific.
MCM (United States)
Through MCM, we are a market leader in portfolio purchasing and recovery in the United States.
Cabot (Europe)
Through Cabot, we are one of the largest credit management services providers in Europe and the United Kingdom. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), and contingent collections, including through Wescot Credit Services Limited (“Wescot”), a leading UK contingency debt collection and BPO services company.
LAAP (Latin America and Asia-Pacific)
We have purchased non-performing loans in Mexico. Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.
To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States and United Kingdom and strengthening and developing our business in the rest of Europe.
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our operations in the United States are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices.
Cabot (Europe)
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our operations in Europe are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business.
Portfolio Purchasing and Recovery
MCM (United States)
In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment in the United States is comprised of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.
We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our U.S. operations. These methods and models allow us to value portfolios accurately (limiting the risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the United States.
Cabot (Europe)
In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase: (1) portfolios that are in insolvency status, in particular, individual voluntary arrangements; and (2) non-performing secured mortgage portfolios and real estate assets previously securing mortgage portfolios. When we take possession of the underlying real estate assets or purchase real estate assets, we refer to those as real estate-owned assets, or REO assets.
We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios accurately and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets we have acquired. We maintain strong relationships with many of the largest financial services providers in the United Kingdom and Europe.
Purchases and Collections
Portfolio Pricing, Supply and Demand
MCM (United States)
With lending surpassing pre-pandemic levels and with rising delinquency rates, we have seen an increase in supply. Issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution. Pricing in the second quarter continued to improve as a result of increased supply. Issuers continue to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We believe continued growth in lending and/or rising delinquency rates or charge-off rates will drive continued growth in supply.
We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and increasing cost of capital. We believe this favors larger participants, like MCM, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements and fluctuating volumes.
The UK market for charged-off portfolios prior to the COVID-19 pandemic generally provided a relatively consistent pipeline of opportunities, despite a historically low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis. An increasing amount of volume is sold in multi-year forward flow arrangements.
The Spanish debt market continues to be one of the largest in Europe with significant debt sales activity, and an expectation of a significant amount of debt to be sold and serviced in the future. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should continue to provide debt purchasing opportunities in Spain.
Banks decreased portfolio sales at the beginning of the COVID-19 pandemic in order to focus on customers’ needs. While we have seen a resumption of sales activity across many of our European markets, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter. In general, supply remains below pre-pandemic levels while portfolio pricing remains competitive across our European footprint.
Purchases by Geographic Location
The following table summarizes purchases of receivable portfolios by geographic location during the periods presented (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
MCM (United States)
$
213,374
$
116,223
$
426,826
$
210,532
Cabot (Europe)
60,951
56,784
123,930
131,980
Total purchases of receivable portfolios
$
274,325
$
173,007
$
550,756
$
342,512
In the United States, capital deployment increased significantly during the three and six months ended June 30, 2023, as compared to the corresponding periods in the prior year. The majority of our deployments in the U.S. come from forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods. Portfolio purchases in the U.S. were robust as supply increased and pricing improved.
In Europe, capital deployment increased slightly during the three months ended June 30, 2023, as compared to the corresponding period in the prior year. Pricing continues to remain competitive in Europe and as a result purchases were limited as compared to pre-pandemic levels. Capital deployment decreased during the six months ended June 30, 2023, as compared to the corresponding period in the prior year. The decrease was primarily due to the unfavorable impact from foreign currency translation driven by the strengthening of the U.S. dollar against the British Pound.
During the three months ended June 30, 2023 and 2022, we also invested $2.0 million and $22.9 million in REO assets, respectively. During the six months ended June 30, 2023 and 2022, we invested $24.6 million and $35.2 million in REO assets, respectively.
Collections from Purchased Receivables by Channel and Geographic Location
We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collections agencies to whom we pay a fee or commission. We utilize this channel to supplement capacity in our internal call centers, to service accounts in regions where we do not have collections operations or for accounts purchased where we maintain the collection agency servicing relationship. The following table summarizes the total collections by collection channel and geographic area during the periods presented (in thousands):
Gross collections from purchased receivables decreased by $21.2 million, or 4.3%, to $476.5 million during the three months ended June 30, 2023, as compared to $497.7 million during the three months ended June 30, 2022. Gross collections from purchased receivables decreased by $78.2 million, or 7.7%, to $938.9 million during the six months ended June 30, 2023, as compared to $1,017.1 million during the six months ended June 30, 2022.
The decreases in collections in the United States during the three and six months ended June 30, 2023 were primarily a result of lower purchasing volumes in recent periods due to the COVID-19 pandemic. The decreases were also a result of a high level of collections in the year ago periods resulting from changes in consumer behavior during the COVID-19 pandemic, which we believe have now normalized. Collections from purchased receivables in Europe during the three months ended June 30, 2023 were relatively consistent compared to the same period in the prior year. The decrease in collections from purchased receivables in Europe during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was primarily due to the unfavorable impact from foreign currency translation, driven by the strengthening of the U.S. dollar against the British Pound.
Our revenues primarily include debt purchasing revenue, which is revenue recognized from engaging in debt purchasing and recovery activities. We apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as “Investment in receivable portfolios, net” in our condensed consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.
Debt purchasing revenue includes two components:
(1) Revenue from receivable portfolios, which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR) and also includes all revenue from zero basis portfolio (“ZBA”) collections, and
(2) Changes in recoveries, which includes
(a) Recoveries above or below forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period; and
(b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e.
29
amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases).
Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of the accounting standard for Financial Instruments - Credit Losses (“CECL”) in January 2020. We did not establish a negative allowance for these pools as we elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of these legacy pools. Similar to how we treated ZBA collections prior to the adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our condensed consolidated statements of income.
Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans in Europe.
Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios and real estate assets in Europe and LAAP.
The following table summarizes revenues for the periods presented (in thousands, except percentages):
Three Months Ended June 30,
2023
2022
$ Change
% Increase (decrease)
Revenue recognized from portfolio basis
$
293,509
$
297,552
$
(4,043)
(1.4)
%
ZBA revenue
7,675
8,730
(1,055)
(12.1)
%
Revenue from receivable portfolios
301,184
306,282
(5,098)
(1.7)
%
Recoveries (below) above forecast
(477)
9,935
(10,412)
(104.8)
%
Changes in expected future recoveries
(3,009)
15,215
(18,224)
(119.8)
%
Changes in recoveries
(3,486)
25,150
(28,636)
(113.9)
%
Debt purchasing revenue
297,698
331,432
(33,734)
(10.2)
%
Servicing revenue
21,008
23,788
(2,780)
(11.7)
%
Other revenues
4,338
1,697
2,641
155.6
%
Total revenues
$
323,044
$
356,917
$
(33,873)
(9.5)
%
Six Months Ended June 30,
2023
2022
$ Change
% Increase (decrease)
Revenue recognized from portfolio basis
$
581,899
$
592,673
$
(10,774)
(1.8)
%
ZBA revenue
14,959
17,714
(2,755)
(15.6)
%
Revenue from receivable portfolios
596,858
610,387
(13,529)
(2.2)
%
Recoveries (below) above forecast
(15,835)
56,287
(72,122)
(128.1)
%
Changes in expected future recoveries
2,848
136,086
(133,238)
(97.9)
%
Changes in recoveries
(12,987)
192,373
(205,360)
(106.8)
%
Debt purchasing revenue
583,871
802,760
(218,889)
(27.3)
%
Servicing revenue
43,593
49,934
(6,341)
(12.7)
%
Other revenues
8,210
3,905
4,305
110.2
%
Total revenues
$
635,674
$
856,599
$
(220,925)
(25.8)
%
30
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. The foreign currency translation effect was immaterial to our operating results during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Our revenues were unfavorably impacted by foreign currency translation, primarily as a result of the strengthening of the U.S. dollar against the British Pound by 5.2% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
The decrease in revenue recognized from portfolio basis during the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, other than resulting from the unfavorable impact from foreign currency translation for the six months ended periods discussed above, was primarily due to lower EIR for recent portfolio purchases.
As discussed above, ZBA revenue represents collections from our legacy ZBA pools. We expect our ZBA revenue to continue to decline as we collect on these legacy pools. We do not expect to have new ZBA pools in the future.
Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. Collections during the three months ended June 30, 2023, were slightly below forecast by $0.5 million. Collections during the six months ended June 30, 2023 under-performed the forecasted collections by approximately $15.8 million. The under-performance was primarily attributable to shifts in the timing of collections for recent U.S. vintages as consumers transitioned back to more normalized payment behavior. The under-performance during the six months ended June 30, 2023, was also partly due to court closures in Spain resulting from labor unrest in the court system during the first quarter of 2023.
When reassessing the forecasts of expected lifetime recoveries during the three months ended June 30, 2023, management considered, among other factors, historical and current collection performance, changes in consumer behavior, and the macroeconomic environment and believes that forecasted collections for certain static pools resulted in decreased total expected recoveries. As a result, we have updated our forecast, resulting in changes in timing and amount of total estimated remaining collections which in turn, when discounted to present value, resulted in a net negative change in expected future recoveries of approximately $3.0 million during the three months ended June 30, 2023. This negative change in expected future recoveries, together with the positive changes recorded in the first quarter, resulted in a net positive change of expected future recoveries of $2.8 million during the six months ended June 30, 2023. During the three and six months ended June 30, 2022, we recorded approximately $15.2 million and $136.1 million, respectively, in net positive change in expected future period recoveries as a result of reforecasting our expected future recoveries based on the COVID-19 pandemic-related consumer behavior observed at that time.
31
The following tables summarize collections from purchased receivables, revenue from receivable portfolios, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages):
Three Months Ended June 30, 2023
As of June 30, 2023
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
7,661
$
7,661
$
—
$
—
—
%
2011
3,838
2,911
933
1,148
88.6
%
2012
4,401
3,474
904
2,822
42.0
%
2013
9,618
8,424
783
6,624
40.5
%
2014
5,983
3,588
1,308
17,219
6.7
%
2015
5,323
2,774
445
22,190
3.9
%
2016
9,781
5,141
935
38,939
4.1
%
2017
16,059
9,175
1,524
51,617
5.5
%
2018
24,267
13,287
(468)
103,689
4.0
%
2019
44,135
23,853
1,428
196,740
3.8
%
2020
52,308
27,263
1,855
230,967
3.7
%
2021
49,660
28,831
(6,322)
226,694
3.9
%
2022
67,843
46,166
(10,489)
477,683
3.1
%
2023
34,939
25,640
5,742
425,692
2.9
%
Subtotal
335,816
208,188
(1,422)
1,802,024
3.8
%
Europe:
ZBA
14
14
—
—
—
%
2013
14,968
13,342
(2,475)
136,517
3.2
%
2014
14,483
11,492
(1,262)
126,193
3.0
%
2015
9,364
7,019
(336)
94,405
2.5
%
2016(1)
10,031
6,489
360
75,211
2.8
%
2017
13,098
7,613
(16)
131,793
1.9
%
2018
12,709
8,217
(2,291)
171,570
1.6
%
2019
14,189
8,103
1,807
143,331
1.9
%
2020
9,585
6,074
2,597
91,317
2.2
%
2021
14,850
10,402
1,570
184,929
1.9
%
2022
17,998
10,518
(4,169)
216,668
1.6
%
2023
8,049
3,713
2,151
124,221
1.3
%
Subtotal
139,338
92,996
(2,064)
1,496,155
2.1
%
Other geographies:(2)
All vintages
1,368
—
—
32,807
—
%
Subtotal
1,368
—
—
32,807
—
%
Total
$
476,522
$
301,184
$
(3,486)
$
3,330,986
3.0
%
_______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2)All portfolios are on non-accrual basis. Annual pool groups for other geographies have been aggregated for disclosure purposes.
32
Three Months Ended June 30, 2022
As of June 30, 2022
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
8,725
$
8,725
$
—
$
—
—
%
2011
5,253
4,242
1,073
1,689
88.6
%
2012
5,524
4,349
1,325
3,723
42.0
%
2013
11,826
11,763
(538)
9,301
40.5
%
2014
6,533
4,195
1,190
20,293
6.7
%
2015
6,623
3,539
23
27,988
3.9
%
2016
13,839
7,427
(251)
55,248
4.1
%
2017
22,833
14,174
(2,001)
78,831
5.5
%
2018
39,621
20,076
2,972
161,982
3.9
%
2019
69,058
35,307
9,621
295,288
3.8
%
2020
84,006
39,583
17,256
342,524
3.7
%
2021
64,415
41,294
1,689
336,472
3.9
%
2022
16,984
13,481
829
209,403
3.2
%
Subtotal
355,240
208,155
33,188
1,542,742
4.3
%
Europe:
ZBA
6
5
—
—
—
%
2013
18,214
15,405
(1,003)
152,162
3.2
%
2014
17,115
12,494
4,619
136,906
3.0
%
2015
11,042
7,725
996
103,525
2.4
%
2016(1)
10,794
7,747
1,171
92,536
2.8
%
2017
16,163
10,263
(8,896)
165,639
1.9
%
2018
15,989
10,299
(4,059)
207,404
1.6
%
2019
16,078
9,687
3,103
169,486
1.9
%
2020
11,754
7,233
2,765
103,419
2.3
%
2021
16,841
12,099
(7,580)
201,957
1.9
%
2022
7,830
5,170
846
122,773
1.8
%
Subtotal
141,826
98,127
(8,038)
1,455,807
2.2
%
Other geographies:(2)
All vintages
645
—
—
36,574
—
%
Subtotal
645
—
—
36,574
—
%
Total
$
497,711
$
306,282
$
25,150
$
3,035,123
3.3
%
______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2)Annual pool groups for other geographies have been aggregated for disclosure purposes.
33
Six Months Ended June 30, 2023
As of June 30, 2023
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
14,943
$
14,943
$
—
$
—
—
%
2011
7,207
6,367
663
1,148
88.6
%
2012
8,669
7,262
1,140
2,822
42.0
%
2013
18,709
17,382
551
6,624
40.5
%
2014
11,051
7,395
1,531
17,219
6.7
%
2015
10,714
5,793
752
22,190
3.9
%
2016
19,690
10,769
1,323
38,939
4.1
%
2017
33,109
19,269
3,047
51,617
5.5
%
2018
51,045
28,079
(2,058)
103,689
4.0
%
2019
93,342
50,119
3,360
196,740
3.8
%
2020
110,805
57,509
3,145
230,967
3.7
%
2021
104,148
60,751
(9,717)
226,694
3.9
%
2022
138,723
95,302
(19,288)
477,683
3.1
%
2023
42,331
31,822
9,773
425,692
2.9
%
Subtotal
664,486
412,762
(5,778)
1,802,024
3.8
%
Europe:
ZBA
16
16
—
—
—
%
2013
30,375
26,571
(3,371)
136,517
3.2
%
2014
28,313
22,892
(1,692)
126,193
3.0
%
2015
18,065
13,999
(1,057)
94,405
2.5
%
2016(1)
19,378
13,037
46
75,211
2.8
%
2017
26,212
15,370
(709)
131,793
1.9
%
2018
24,669
16,537
(4,855)
171,570
1.6
%
2019
28,074
16,361
490
143,331
1.9
%
2020
19,944
12,289
2,869
91,317
2.2
%
2021
30,929
20,897
1,226
184,929
1.9
%
2022
35,430
21,100
(3,548)
216,668
1.6
%
2023
10,721
5,027
3,392
124,221
1.3
%
Subtotal
272,126
184,096
(7,209)
1,496,155
2.1
%
Other geographies:(2)
All vintages
2,266
—
—
32,807
—
%
Subtotal
2,266
—
—
32,807
—
%
Total
$
938,878
$
596,858
$
(12,987)
$
3,330,986
3.0
%
____________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2)Annual pool groups for other geographies have been aggregated for disclosure purposes.
34
Six Months Ended June 30, 2022
As of June 30, 2022
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
17,696
$
17,696
$
—
$
—
—
%
2011
10,580
8,143
2,608
1,689
88.6
%
2012
10,931
8,161
3,446
3,723
42.0
%
2013
24,465
23,835
(20)
9,301
40.5
%
2014
13,597
8,703
2,267
20,293
6.7
%
2015
13,970
7,719
(2,299)
27,988
3.9
%
2016
29,388
15,414
2,647
55,248
4.1
%
2017
49,002
28,677
7,173
78,831
5.5
%
2018
83,650
39,146
36,648
161,982
3.9
%
2019
146,018
68,727
71,733
295,288
3.8
%
2020
175,644
78,476
79,186
342,524
3.7
%
2021
129,889
85,535
760
336,472
3.9
%
2022
21,022
17,163
3,363
209,403
3.2
%
Subtotal
725,852
407,395
207,512
1,542,742
4.3
%
Europe:
ZBA
19
18
—
—
—
%
2013
37,679
32,376
(2,941)
152,162
3.2
%
2014
35,392
26,355
3,352
136,906
3.0
%
2015
22,812
16,292
(354)
103,525
2.4
%
2016(1)
21,594
16,308
(302)
92,536
2.8
%
2017
33,377
21,642
(11,228)
165,639
1.9
%
2018
33,467
21,588
(5,367)
207,404
1.6
%
2019
34,658
20,408
3,693
169,486
1.9
%
2020
24,978
15,115
5,365
103,419
2.3
%
2021
34,898
25,294
(8,933)
201,957
1.9
%
2022
10,798
7,596
1,576
122,773
1.8
%
Subtotal
289,672
202,992
(15,139)
1,455,807
2.2
%
Other geographies:(2)
All vintages
1,601
—
—
36,574
—
%
Subtotal
1,601
—
—
36,574
—
%
Total
$
1,017,125
$
610,387
$
192,373
$
3,035,123
3.3
%
____________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2)Annual pool groups for other geographies have been aggregated for disclosure purposes.
Servicing revenues during the three and six months ended June 30, 2023 decreased as compared to servicing revenues during the three and six months ended June 30, 2022. The decreases were primarily attributable to reduced demand from BPO clients of $2.1 million and $2.9 million, respectively, and the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S. dollar against the British Pound.
Other revenues increased during the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, primarily driven by increases of approximately $2.7 million and $4.4 million of gains recognized on the sale of real estate assets in the respective comparison periods.
The following table summarizes operating expenses for the periods presented (in thousands, except percentages):
Three Months Ended June 30,
2023
2022
$ Change
% Change
Salaries and employee benefits
$
95,855
$
98,880
$
(3,025)
(3.1)
%
Cost of legal collections
57,150
55,148
2,002
3.6
%
General and administrative expenses
34,529
34,967
(438)
(1.3)
%
Other operating expenses
26,349
27,405
(1,056)
(3.9)
%
Collection agency commissions
10,387
9,923
464
4.7
%
Depreciation and amortization
10,702
11,646
(944)
(8.1)
%
Total operating expenses
$
234,972
$
237,969
$
(2,997)
(1.3)
%
Six Months Ended June 30,
2023
2022
$ Change
% Change
Salaries and employee benefits
$
199,705
$
195,836
$
3,869
2.0
%
Cost of legal collections
111,251
110,865
386
0.3
%
General and administrative expenses
72,494
68,501
3,993
5.8
%
Other operating expenses
53,905
54,432
(527)
(1.0)
%
Collection agency commissions
18,537
19,528
(991)
(5.1)
%
Depreciation and amortization
21,572
23,475
(1,903)
(8.1)
%
Total operating expenses
$
477,464
$
472,637
$
4,827
1.0
%
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. The foreign currency translation effect was immaterial to our operating results during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Our operating expenses were favorably impacted by foreign currency translation, primarily as a result of the strengthening of the U.S. dollar against the British Pound by approximately 5.2% for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
The decrease in salaries and employee benefits during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, was primarily due to the following reasons:
•Decrease in employee bonus accrual of approximately $5.8 million primarily attributed to additional bonus accrued in 2022 and paid out in the first quarter of 2023;
•Decrease in stock-based compensation expense of $1.2 million primarily attributed to forfeiture of certain stock awards; and
•The decrease was partially offset by increased salaries due to market adjustments and increase in overall headcount.
The increase in salaries and employee benefits during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, was primarily due to the following reasons:
•Increase in overall headcount;
•Increased salaries due to market adjustments; and
•The increase was partially offset by decreased stock-based compensation expense of $1.1 million primarily attributed to forfeiture of certain stock awards.
Cost of legal collections is primarily contingent fees paid to our external network of attorneys and the cost of litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our condensed consolidated statements of income.
The following table summarizes our cost of legal collections during the periods presented (in thousands, except percentages):
Three Months Ended June 30,
2023
2022
$ Change
% Change
Court costs
$
33,009
$
30,742
$
2,267
7.4
%
Legal collection fees
24,141
24,406
(265)
(1.1)
%
Total cost of legal collections
$
57,150
$
55,148
$
2,002
3.6
%
Six Months Ended June 30,
2023
2022
$ Change
% Change
Court costs
$
63,026
$
61,578
$
1,448
2.4
%
Legal collection fees
48,225
49,287
(1,062)
(2.2)
%
Total cost of legal collections
$
111,251
$
110,865
$
386
0.3
%
The increases of cost of legal collections during the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, were primarily due to increased legal placement in this channel. The increase during the six months ended June 30, 2023 as compared to the same period in the prior year was partially offset by the favorable impact of foreign currency translation of approximately $1.2 million, driven by the strengthening of the U.S. dollar against the British Pound.
General and Administrative Expenses
The decrease in general and administrative expense during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, was primarily due to the following reasons:
•Decrease in costs associated with consulting and legal fees of approximately $3.9 million; and
•The decrease was partially offset by an increase in information technology expenses of $2.8 million.
The increase in general and administrative expense during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, was primarily due to the following reasons:
•Approximately $7.3 million of increased general and administrative expense include costs associated with our information technology, business travel, and facilities expense; and
•The increase was partially offset by the favorable impact of foreign currency translation of approximately $1.2 million, driven by the strengthening of the U.S. dollar against the British Pound.
Other Operating Expenses
The slight decrease in other operating expenses during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, was primarily due to a slight decrease in temporary services and direct collection expenses. Other operating expenses during the six months ended June 30, 2023, remained relatively consistent as compared to the six months ended June 30, 2022.
Collection Agency Commissions
Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections agencies channel are predominately in Europe and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commission rates vary depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts.
The decreases in depreciation and amortization expense during the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, were primarily due to slightly smaller depreciable or amortizable asset balances. The decrease during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 was also due to the favorable impact of foreign currency translation, driven by the strengthening of the U.S. dollar against the British Pound.
Interest Expense
The following table summarizes our interest expense for the periods presented (in thousands, except percentages):
Three Months Ended June 30,
2023
2022
$ Change
% Change
Stated interest on debt obligations
$
45,917
$
33,102
$
12,815
38.7
%
Amortization of debt issuance costs
3,706
3,618
88
2.4
%
Amortization of debt discount
360
334
26
7.8
%
Total interest expense
$
49,983
$
37,054
$
12,929
34.9
%
Six Months Ended June 30,
2023
2022
$ Change
% Change
Stated interest on debt obligations
$
88,158
$
63,539
$
24,619
38.7
%
Amortization of debt issuance costs
7,950
7,469
481
6.4
%
Amortization of debt discount
710
679
31
4.6
%
Total interest expense
$
96,818
$
71,687
$
25,131
35.1
%
The increase in interest expense during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, was primarily due to the following reasons:
•The effect resulting from rising interest rates of approximately $10.2 million; and
•The effect resulting from increased average debt balance of approximately $2.2 million.
The increase in interest expense during the during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, was primarily due to the following reasons:
•The effect resulting from rising interest rates of approximately $20.0 million; and
•The effect resulting from increased average debt balance of approximately $3.2 million.
•The increase was partially offset by the favorable impact of foreign currency translation of approximately $1.7 million, primarily by the strengthening of the U.S. dollar against the British Pound and Euro.
Other Expense, net of Other Income
Other income or expense consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses recognized on certain transactions outside of our normal course of business. Other expense, net, was $1.8 million and less than $0.1 million during the three and six months ended June 30, 2023, respectively. Other income, net, was $1.8 million and $2.2 million during the three and six months ended June 30, 2022, respectively.
Provision for Income Taxes
Provision for income taxes and effective tax rate are as follows for the periods presented ($in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Provision for income taxes
$
10,029
$
23,250
$
16,438
$
78,274
Effective tax rate
27.6
%
27.8
%
26.8
%
24.9
%
For the three months ended June 30, 2023 the difference between our effective tax rate and the federal statutory rate was primarily due to state taxes and a foreign adjustment. For the six months ended June 30, 2023, the difference between our effective tax rate and the federal statutory rate was primarily due to state income taxes and an accrual related to state tax filing
positions, and other foreign adjustments. For the three and six months ended June 30, 2022, the difference between our effective tax rate and the federal statutory rate was primarily due to the proportion of income earned in higher tax rate jurisdictions compared to lower tax rate jurisdictions.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
GAAP net income, as reported
$
26,305
$
60,439
$
44,931
$
236,188
Adjustments:
Interest expense
49,983
37,054
96,818
71,687
Interest income
(1,123)
(588)
(2,067)
(1,025)
Provision for income taxes
10,029
23,250
16,438
78,274
Depreciation and amortization
10,702
11,646
21,572
23,475
Stock-based compensation expense
3,873
5,119
7,925
9,040
Acquisition, integration and restructuring related expenses(1)
454
487
5,980
1,166
Adjusted EBITDA
$
100,223
$
137,407
$
191,597
$
418,805
Collections applied to principal balance(2)
$
190,658
$
170,112
$
373,639
$
223,679
________________________
(1)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. For the three and six months ended June 30, 2023 amount represents costs related to headcount reductions in Europe. The remainder of the costs relating to the headcount reductions in Europe are included in stock-based compensation expense.
(2)Collections applied to principal balance is calculated in the table below:
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
2023
2022
Collections applied to investment in receivable portfolios, net
The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase.
Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. For example, in the U.K., due to the higher concentration of payment plans, as compared to the U.S. and other locations in Europe, we expect to receive streams of collections over longer periods of time. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable indicator of future results in other locations or for other types of portfolio.
The supplemental performance data presented in this section is impacted by foreign currency translation, which represents the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international purchases, collections, and ERC.
We utilize proprietary forecasting models to continuously evaluate the economic life of each pool.
Cumulative Collections Money Multiple - Cumulative Collections from Purchased Receivables to Purchase Price Multiple
The following table summarizes our receivable purchases, related gross collections, and cumulative collections money multiples (in thousands, except multiples):
Year of Purchase
Purchase
Price(1)
Cumulative Collections through June 30, 2023
<2014
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Total(2)
CCMM(3)
United States:
<2014
$
3,244,415
$
6,065,954
$
1,048,635
$
768,510
$
523,386
$
377,466
$
277,776
$
221,292
$
169,334
$
152,031
$
115,602
$
49,528
$
9,769,514
3.0
2014
517,644
144,178
307,814
216,357
142,147
94,929
69,059
47,628
34,896
25,212
11,051
1,093,271
2.1
2015
499,041
105,610
231,102
186,391
125,673
85,042
64,133
42,774
25,655
10,714
877,094
1.8
2016
552,992
110,875
283,035
234,690
159,279
116,452
87,717
51,650
19,690
1,063,388
1.9
2017
527,589
111,902
315,853
255,048
193,328
144,243
85,348
33,109
1,138,831
2.2
2018
629,453
175,042
351,696
308,302
228,919
144,566
51,045
1,259,570
2.0
2019
675,567
174,693
416,315
400,250
256,444
93,342
1,341,044
2.0
2020
538,204
213,450
430,514
311,573
110,805
1,066,342
2.0
2021
404,364
120,354
240,605
104,148
465,107
1.2
2022
551,595
98,277
138,723
237,000
0.4
2023
426,431
42,331
42,331
0.1
Subtotal
8,567,295
6,065,954
1,192,813
1,181,934
1,081,720
1,100,941
1,223,963
1,316,109
1,528,942
1,641,698
1,354,932
664,486
18,353,492
2.1
Europe:
<2014
619,079
134,259
249,307
212,129
165,610
146,993
132,663
113,228
93,203
93,907
68,938
30,375
1,440,612
2.3
2014
623,129
135,549
198,127
156,665
137,806
129,033
105,337
84,255
84,169
65,156
28,313
1,124,410
1.8
2015
419,941
65,870
127,084
103,823
88,065
72,277
55,261
57,817
42,660
18,075
630,932
1.5
2016
258,218
44,641
97,587
83,107
63,198
51,609
51,017
40,214
19,384
450,757
1.7
2017
461,571
68,111
152,926
118,794
87,549
86,107
61,762
26,212
601,461
1.3
2018
432,258
49,383
118,266
78,846
80,629
61,691
24,669
413,484
1.0
2019
273,354
44,118
80,502
88,448
63,607
28,074
304,749
1.1
2020
116,227
22,721
59,803
45,757
19,944
148,225
1.3
2021
255,788
43,082
66,529
30,929
140,540
0.5
2022
244,508
36,957
35,430
72,387
0.3
2023
123,930
10,721
10,721
0.1
Subtotal
3,828,003
134,259
384,856
476,126
494,000
554,320
635,177
635,218
553,946
644,979
553,271
272,126
5,338,278
1.4
Other geographies(4):
All vintages
340,283
10,465
29,828
42,665
109,884
112,383
108,480
75,601
28,960
20,682
3,334
2,266
544,548
1.6
Subtotal
340,283
10,465
29,828
42,665
109,884
112,383
108,480
75,601
28,960
20,682
3,334
2,266
544,548
1.6
Total
$
12,735,581
$
6,210,678
$
1,607,497
$
1,700,725
$
1,685,604
$
1,767,644
$
1,967,620
$
2,026,928
$
2,111,848
$
2,307,359
$
1,911,537
$
938,878
$
24,236,318
1.9
________________________
(1)Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2)Cumulative collections from inception through June 30, 2023, excluding collections on behalf of others.
(3)Cumulative Collections Money Multiple (“CCMM”) through June 30, 2023 refers to cumulative collections as a multiple of purchase price.
(4)Annual pool groups for other geographies have been aggregated for disclosure purposes.
Purchase Price Multiple - Total Estimated Collections from Purchased Receivables to Purchase Price Multiple
The following table summarizes our purchases, resulting historical gross collections, estimated remaining gross collections from purchased receivables, and purchase price multiple (in thousands, except multiples):
Purchase Price(1)
Historical
Collections(2)
Estimated Remaining Collections
Total Estimated Gross Collections
Purchase Price Multiple(3)
United States:
<2014(4)
$
3,244,415
$
9,769,514
$
232,242
$
10,001,756
3.1
2014(4)
517,644
1,093,271
54,252
1,147,523
2.2
2015
499,041
877,094
49,703
926,797
1.9
2016
552,992
1,063,388
89,257
1,152,645
2.1
2017
527,589
1,138,831
142,421
1,281,252
2.4
2018
629,453
1,259,570
235,777
1,495,347
2.4
2019
675,567
1,341,044
428,383
1,769,427
2.6
2020
538,204
1,066,342
498,471
1,564,813
2.9
2021
404,364
465,107
498,101
963,208
2.4
2022
551,595
237,000
942,430
1,179,430
2.1
2023
426,431
42,331
907,029
949,360
2.2
Subtotal
8,567,295
18,353,492
4,078,066
22,431,558
2.6
Europe:
<2014(4)
619,079
1,440,612
546,876
1,987,488
3.2
2014(4)
623,129
1,124,410
444,915
1,569,325
2.5
2015(4)
419,941
630,932
278,181
909,113
2.2
2016
258,218
450,757
225,119
675,876
2.6
2017
461,571
601,461
301,270
902,731
2.0
2018
432,258
413,484
357,204
770,688
1.8
2019
273,354
304,749
318,141
622,890
2.3
2020
116,227
148,225
208,855
357,080
3.1
2021
255,788
140,540
400,108
540,648
2.1
2022
244,508
72,387
407,081
479,468
2.0
2023
123,930
10,721
209,953
220,674
1.8
Subtotal
3,828,003
5,338,278
3,697,703
9,035,981
2.4
Other geographies(5):
All vintages
340,283
544,548
51,900
596,448
1.8
Subtotal
340,283
544,548
51,900
596,448
1.8
Total
$
12,735,581
$
24,236,318
$
7,827,669
$
32,063,987
2.5
________________________
(1)Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2)Cumulative collections from inception through June 30, 2023, excluding collections on behalf of others.
(3)Purchase Price Multiple represents total estimated gross collections divided by the purchase price.
(4)Includes portfolios acquired in connection with certain business combinations.
(5)Annual pool groups for other geographies have been aggregated for disclosure purposes.
Estimated Remaining Gross Collections by Year of Purchase
The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets (in thousands):
Estimated Remaining Gross Collections by Year of Purchase(1)
2023(3)
2024
2025
2026
2027
2028
2029
2030
2031
>2031
Total(2)
United States:
<2014(4)
$
41,433
$
62,439
$
43,028
$
29,909
$
20,682
$
14,010
$
9,169
$
5,790
$
3,405
$
2,377
$
232,242
2014(4)
9,669
13,914
9,362
6,599
4,654
3,283
2,317
1,636
1,155
1,663
54,252
2015
8,927
13,134
8,523
5,838
4,106
2,893
2,042
1,444
1,023
1,773
49,703
2016
16,067
23,829
15,741
10,393
7,097
4,990
3,515
2,481
1,754
3,390
89,257
2017
24,917
37,580
25,263
17,218
11,455
7,885
5,560
3,930
2,786
5,827
142,421
2018
41,282
62,039
42,294
28,655
19,497
12,874
8,860
6,255
4,429
9,592
235,777
2019
76,619
115,771
76,492
51,105
34,583
23,532
15,621
10,804
7,611
16,245
428,383
2020
88,542
131,644
90,474
60,167
40,813
27,819
18,928
12,641
8,798
18,645
498,471
2021
90,973
134,885
86,658
59,624
39,795
27,175
18,767
13,003
8,907
18,314
498,101
2022
141,432
281,831
168,896
108,646
75,134
51,039
35,632
25,207
17,910
36,703
942,430
2023
93,088
200,568
236,417
133,241
77,728
52,602
35,139
24,332
17,262
36,652
907,029
Subtotal
632,949
1,077,634
803,148
511,395
335,544
228,102
155,550
107,523
75,040
151,181
4,078,066
Europe:
<2014(4)
31,984
59,238
54,152
49,870
45,929
42,500
39,101
35,850
32,639
155,613
546,876
2014(4)
28,822
52,749
46,723
41,914
37,523
34,842
31,527
28,608
25,830
116,377
444,915
2015(4)
19,492
33,315
29,837
26,999
24,263
21,414
19,497
17,627
15,812
69,925
278,181
2016
17,692
32,573
27,915
24,605
20,727
16,683
14,777
12,499
11,156
46,492
225,119
2017
24,220
42,479
36,486
31,214
27,808
23,166
20,214
17,607
15,263
62,813
301,270
2018
26,795
49,473
43,101
37,486
32,565
28,352
24,542
21,080
18,573
75,237
357,204
2019
27,088
48,157
41,529
33,575
27,709
23,227
20,327
17,400
15,098
64,031
318,141
2020
19,539
34,854
30,069
25,665
19,477
14,743
11,509
9,458
8,064
35,477
208,855
2021
32,119
61,735
53,299
46,890
40,074
33,028
26,560
21,360
17,955
67,088
400,108
2022
36,712
68,824
58,198
48,474
39,795
32,525
26,940
21,975
17,847
55,791
407,081
2023
17,786
39,302
32,395
25,730
20,741
16,471
13,047
10,297
8,316
25,868
209,953
Subtotal
282,249
522,699
453,704
392,422
336,611
286,951
248,041
213,761
186,553
774,712
3,697,703
Other geographies(5):
All vintages
4,490
7,966
6,641
5,676
4,898
4,197
3,649
3,229
2,728
8,426
51,900
Subtotal
4,490
7,966
6,641
5,676
4,898
4,197
3,649
3,229
2,728
8,426
51,900
Portfolio ERC
919,688
1,608,299
1,263,493
909,493
677,053
519,250
407,240
324,513
264,321
934,319
7,827,669
REO ERC(6)
16,331
47,857
50,541
20,263
7,951
6,586
2,155
—
—
—
151,684
Total ERC
$
936,019
$
1,656,156
$
1,314,034
$
929,756
$
685,004
$
525,836
$
409,395
$
324,513
$
264,321
$
934,319
$
7,979,353
________________________
(1)As of June 30, 2023, ERC for Zero Basis Portfolios include approximately $62.4 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial. ERC also includes approximately $58.1 million from cost recovery portfolios, primarily in other geographies.
(2)Represents the expected remaining gross cash collections over a 180-month period. As of June 30, 2023, ERC for 84-month and 120-month periods were:
84-Month ERC
120-Month ERC
United States
$
3,802,811
$
3,999,322
Europe
2,634,377
3,162,271
Other geographies
39,213
46,703
Portfolio ERC
6,476,401
7,208,296
REO ERC
151,684
151,684
Total ERC
$
6,628,085
$
7,359,980
(3)Amount for 2023 consists of six months data from July 1, 2023 to December 31, 2023.
(4)Includes portfolios acquired in connection with certain business combinations.
(5)Annual pool groups for other geographies have been aggregated for disclosure purposes.
(6)Real estate-owned assets ERC includes approximately $150.3 million and $1.4 million of estimated future cash flows for Europe and Other Geographies, respectively.
Estimated Future Collections Applied to Investment in Receivable Portfolios
As of June 30, 2023, we had $3.3 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands):
Years Ending December 31,
United States
Europe
Other Geographies
Total
2023(1)
$
239,313
$
101,759
$
3,813
$
344,885
2024
464,468
198,575
6,049
669,092
2025
386,314
172,311
5,024
563,649
2026
237,498
148,098
4,275
389,871
2027
149,919
126,608
3,606
280,133
2028
100,509
106,124
3,060
209,693
2029
67,592
91,306
2,629
161,527
2030
46,568
78,254
2,314
127,136
2031
32,947
69,347
1,947
104,241
2032
23,596
64,082
90
87,768
2033
17,222
59,730
—
76,952
2034
12,604
57,991
—
70,595
2035
9,577
58,478
—
68,055
2036
7,765
61,086
—
68,851
2037
4,924
65,918
—
70,842
2038
1,208
36,488
—
37,696
Total
$
1,802,024
$
1,496,155
$
32,807
$
3,330,986
________________________
(1)Amount for 2023 consists of six months data from July 1, 2023 to December 31, 2023.
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activities for the periods presented (in thousands):
Six Months Ended June 30,
2023
2022
(Unaudited)
Net cash provided by operating activities
$
62,623
$
98,530
Net cash (used in) provided by investing activities
(214,246)
35,107
Net cash provided by (used in) financing activities
190,626
(155,600)
Operating Cash Flows
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities.
Net cash provided by operating activities was $62.6 million and $98.5 million during the six months ended June 30, 2023 and 2022, respectively. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in recoveries, stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.
Cash flows relating to investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the investment in receivable portfolios.
Net cash used in investing activities was $214.2 million during the six months ended June 30, 2023 and net cash provided by investing activities was $35.1 million during the six months ended June 30, 2022. Receivable portfolio purchases, net of put-backs, were $544.7 million and $337.9 million during the six months ended June 30, 2023 and 2022, respectively. Collection proceeds applied to the investment in receivable portfolios, were $342.0 million and $406.7 million during the six months ended June 30, 2023 and 2022, respectively.
Financing Cash Flows
Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes.
Net cash provided by financing activities was $190.6 million during the six months ended June 30, 2023 and net cash used in financing activities was $155.6 million during the six months ended June 30, 2022. Borrowings under our credit facilities were $444.8 million and $446.9 million during the six months ended June 30, 2023 and 2022, respectively. Repayments of amounts outstanding under our credit facilities were $259.8 million and $298.7 million during the six months ended June 30, 2023 and 2022, respectively. During the six months ended June 30, 2023, we issued $230.0 million 4.00% convertible senior notes that mature in 2029, and used $192.5 million of the proceeds from the convertible senior notes to partially repurchase our exchangeable senior notes due 2023. During the six months ended June 30, 2022, we paid $221.2 million to settle our convertible senior notes due 2022 using cash on hand and drawings under our Global Senior Facility.
Capital Resources
Our primary sources of capital are cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets, we consider additional financings to fund our operations and any potential acquisitions. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements include funding the purchase of receivable portfolios, operating expenses, the payment of interest and principal on borrowings, the payment of income taxes, funding any entity acquisitions and share repurchases.
We are in material compliance with all covenants under our financing arrangements. See “Note 7: Borrowings” in the notes to our condensed consolidated financial statements for a further discussion of our debt. Available capacity under our Global Senior Facility, was $310.5 million as of June 30, 2023.
Our Board of Directors has approved a $300.0 million share repurchase program. Repurchases under this program are expected to be made from cash on hand and/or a drawing from our Global Senior Facility and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by our management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at our discretion. During the three and six months ended June 30, 2023, we did not make any repurchases under the share repurchase program. During the three and six months ended June 30, 2022, we repurchased 424,091 and 823,613 shares of our common stock for approximately $25.1 million and $50.7 million, respectively. Our practice is to retire the shares repurchased. As of June 30, 2023, authorization for $91.9 million of share repurchases remained under the share repurchase program.
Our cash and cash equivalents as of June 30, 2023, consisted of $21.2 million held by U.S.-based entities and $163.7 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.
Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was $22.2 million as of June 30, 2023.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, timing of cash collections from our consumers, and other risks detailed in our Risk Factors. However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and ability to collect on investment in receivable portfolios.
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our actual results could differ from these estimates under different assumptions or conditions. Refer to “Critical Accounting Policies and Estimates” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, for a complete discussion of our critical accounting policies and estimates. Other than the ongoing reassessment of expected future recoveries of our investment in receivable portfolios during each reporting period under our CECL accounting policy as discussed in “Note 5: Investment in Receivable Portfolios, Net” to our condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rates. As of June 30, 2023, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Interest Rates. As of June 30, 2023, there had not been a material change in the interest rate risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Item 4 – Controls and Procedures
Attached as exhibits to this Form 10-Q are the certifications required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This section includes information concerning the controls and controls evaluation referred to in the certifications.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and accordingly, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on their most recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information with respect to this item may be found in “Note 11: Commitments and Contingencies,” to the condensed consolidated financial statements.
Item 1A – Risk Factors
There is no material change in the information reported under “Part I-Item 1A-Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Inline XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. (filed herewith)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ENCORE CAPITAL GROUP, INC.
By:
/s/ Jonathan C. Clark
Jonathan C. Clark
Executive Vice President,
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
