What CCP’s results say about the health of the economy

What CCP’s results say about the health of the economy

Credit Corp (ASX: CCP), which is a buyer of debt, is a company we follow quite closely. Apart from being a potential investment, CCP’s fortunes provide a keen insight into the level of financial stress in the real economy. So, the company’s recent results were a good indicator of where we are at.

Credit Corp’s main business is to buy overdue and written-off debt at a discount from various companies including banks and utility companies etc. and then try to collect more than they paid for the debt over time. This provides corporates with quick access to cash without having to have a lot of people employed trying to chase customers for overdue payments.

As Credit Corp specialises in structuring payment plans and working out solutions with people who are in arrears, they are in general able to collect quite a bit more than they pay for the debt. Also a while ago they launched a new business lending money to credit impaired people at quite high interest rates (approximately 47 per cent effective interest rate) through their Walletwizard business. They are very good at what they do and are generating return on equity (RoE) and return on capital employed (ROCE) of above 20 per cent in normal years.

You would imagine that the COVID-19 crisis would have been good for a business relying on people not being able to repay their debt but the opposite has actually been the case. Due to a combination of factors:

• Lenders and other companies put in place forbearance procedures for their customers who could not pay and have been giving payment holidays and the like, reducing debt that is technically overdue. Contributing to this is the various stimulus packages put in place by governments both in Australia and the US, which is Credit Corp’s other market, which helped some people who were in arrears to catch up through, for example, super release.
• For political purposes sellers of debt have been hesitant to sell overdue debt in the current climate as it would be bad publicity to have stories of heavy-handed collection practices surface in the media at a time of a crisis.
• Credit Corp tightened up their internal credit criteria for their lending business, leading to lower acceptance rates.

Altogether, this had a negative impact on the general purchase and lending activity, fortunately for Credit Corp, they have been able to take significant market share as their major competitors in Australia are in financial distress. In December Credit Corp managed to basically buy out the existing book of their major competitor Collection House, which compensated for the lower than normal purchase levels. Credit Corp also saw improved collections on their existing book due to government stimulus enabling people to catch up on their overdue debts and, in total, the 1H21 results were actually better than expected.

If we look at the comments from management, these give us some indication of the underlying state of the economy. A couple of comments stand out:

• They are starting to see volumes of debt on offer pick up, which would indicate that companies are starting to wind back forbearance actions and are more willing to classify debt as overdue and write it off and sell. This indicates we should see banks and other companies start to crystalise a bit more of the provisions they have taken during the initial phases of the crisis but it does not look like bad debts are increasing to levels that would necessitate further impairments above what is already provisioned for, which is a good sign for banks etc.
• Interestingly, it sounds like some US competitors have been able to be quite aggressive during the crisis by financing themselves by issuing bonds that they managed to sell directly to the Fed through the Fed’s bond buying programs. This has come to authorities’ attention recently, and the Fed has stopped this, so pricing in US should improve.
• On the lending side, they are (as mentioned earlier) seeing lower volumes lent but this is primarily due to their own actions in tightening up credit criteria. They have actually seen a decent increase in the total number of applications, which indicates that there is increased level of distress in the lower credit worthy segment of the Australian population, which I guess is no surprise as government stimulus packages are now starting to wind down.
• Credit Corp are seeing 40 per cent of the applicants for their Walletwizard loan product having significant Buy-Now-Pay-Later (BNPL) activity in their accounts in the previous three months. This indicates that people are looking to consolidate BNPL debt with Walletwizard debt at an interest rate of about 47 per cent. This does not match well with the BNPL providers’ assertion that they are not credit providers…

Overall, the comments indicate that there is a rising level of financial distress in the economy but probably not more than could be expected from the winding down of the increased Jobseeker payments and the end of early superannuation release.