Credit Corp is a major purchased debt ledger, or PDL, acquirer in Australia, with long-term share of 35%

Business Strategy & Outlook

Credit Corp is a major purchased debt ledger, or PDL, acquirer in Australia, with long-term share of 35%. It is also currently the fourth-largest player in the PDL market with a share of around 12% in fiscal 2022. PDLs are mainly acquired from banks and financial institutions, and are mostly unsecured credit card debt that are at least six months in arrears and already been through a collection process. Other forms of debt purchases include outstanding telephone or utility bills. Earnings are generated by recovering more than its capital outlay. The firm targets returns on equity of 16%-18% and aims to recover double the price paid for PDLs. Prices range from AUD 0.05 to slightly over AUD 0.20 on the dollar of the debt’s face value, averaging between AUD 0.12 and AUD 0.13 on the dollar. Credit Corp does this by acquiring PDLs at sensible prices, and collecting mainly via payment plans. It has historically succeeded in collecting PDLs over the entirety of their typical six-year lives, with actual collections consistently exceeding initial projections.

The firm’s consumer-facing products include impaired consumer loans, auto lending, buy now-pay later, and appliance leasing. It generally lends to credit-impaired consumers who do not have access to primary lenders. These businesses should continue growing, as the banks generally do not service this market. Operating efficiencies are achieved by leveraging off the common overheads and systems of its core Australian PDL operations in both its U.S. PDL and consumer lending businesses, offshoring and digitization. NPAT is to grow at a 5.5% CAGR through to fiscal 2027. However, a lower ROEs can be projected averaging 12% per year from fiscal 2023 to 2027, on anticipation of future returns possibly being structurally lower, with greater mix shift to the more competitive U.S. market. Competition for PDLs will likely heat up as COVID-19 stimuli fade off and competition resumes. Longer term, a combination of low industry barriers to entry, an expectation for governments to bail out consumers during adverse credit events, and greater operational efficiency among peers will likely encourage more aggressive price bidding for PDLs.

Financial Strengths

Credit Corp is currently in sound financial health. Its gearing ratio, measured as net debt divided by carrying value of PDLs and loans, was 12% as of June 30, 2022. Gearing at end of the COVID-19-plagued fiscal 2020 was also zero with no covenants breached, albeit this was supported by a AUD 155 million equity raise. Excluding the capital raising from Credit Corp’s net cash as of fiscal 2020 would result in a gearing ratio of around 23%. This would still be below its target range of 25%-30%, as well as bank covenants of 60% (for its corporate debt facility) and 50% (for its warehouse facility), respectively. Credit Corp has historically been prudent in acquiring PDLs and not outbid its competitors when tender prices for PDLs are excessive. This mitigates the value destruction during a severe credit event which leads to higher defaults/impairments, or breaches of covenants due to insufficient cash. A case in point, its ASX-listed competitors Collection House and Pioneer Credit were both hit by material losses in fiscal 2020, and faced capital constraints or compliance issues due to their prior aggressive growth. Meanwhile, Credit Corp had a 5% net profit margin, though it was also bolstered by an equity raising. It subsequently purchased Collection House’s Australian PDL book–which had ongoing payment arrangements of almost AUD 200 million in face value–for AUD 160 million in fiscal 2021. Credit Corp subsequently bought Collection House’s New Zealand PDL book for AUD 12 million, while also extending the firm AUD 7.5 million working capital loan in early fiscal 2022. When Collection House fell into administration in June 2022, Credit Corp acquired its remaining business and all outstanding shares for AUD 11 million.

Bulls Say

A relatively prudent business model allows for better countercyclical investment and cash collections, which helps fund more purchases and issue more loans. This also supports continued funding and prevents excessive potential value destruction.
Credit Corp has a leaner cost base than its U.S. peers, and is supported by common overheads and technology centered in Australia. This helps it tender for PDLs at a similar footing as its larger competitors.
Credit Corp’s growing track record in the U.S. has made it a viable choice for local firms seeking to diversify their debt collectors.

Company Description

Credit Corp operates in the distressed consumer debt market. In its core business, it acquires purchased debt ledgers, or PDLs, in Australia and is expanding this business globally by buying PDLs in the United States. These PDLs consist of unsecured debt that are at least six months in arrears and have already been through a collection process. Since 2012, Credit Corp also diversified its business into providing consumer credit to customers who are unable to gain access to credit from primary sources such as banks because of a poor credit history. Its consumer credit business is gaining scale but is also subject to increased regulatory scrutiny.

(Source: Morningstar)

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