Debt buyer Collection House has written off A$89.9 million of the value of its purchased debt ledger assets – an impairment that reflects changes to its collection practices forced on it by clients and consumer groups.
The write-off follows the completion of a strategic review of the business and the development of a more “customer focused approach” to debt collection. The company has a reputation for being one of the most punitive debt collectors in the market.
Collection House has been in a trading halt since February and a standstill agreement with its lenders since April. It released its December 2019 half-year financial results last week, reporting a loss of $47.3 million compared with net profit of $8.5 million in the previous corresponding period.
Revenue from collection agency services grew 8.7 per cent to $35 million, while cash collections in the purchased debt ledger business were flat.
The company’s problems go back to August last year, when a report prepared by Financial Counselling Australia, Consumer Action Law Centre and Financial Rights Legal Centre identified the Collection House subsidiary Lion Finance as the debt collection agency with the highest number of court applications to put debtors into bankruptcy.
It made 512 applications in the 2018/19 financial year. Only the ATO made more bankruptcy petitions.
The report said: “A few debt collectors are regularly and persistently making people bankrupt. This is clearly a deliberate policy decision. Such a decision is inconsistent with a best practice approach to working with people in financial hardship.
“Using bankruptcy as an enforcement mechanism is particularly problematic for people on low incomes who own their homes. It is poor public policy when people become homeless over relatively small debts.”
In the post-Hayne environment, lenders have been reluctant to do deal with Collection House and it has had to make changes to its practices.
In November, it increased the threshold at which it will consider recovery by bankruptcy, moving from the regulatory limit of $5000 to $20,000.
Last week the company said it had completed a strategic review. Changes include “a greater focus on understanding our customers’ circumstances, supporting vulnerable customers and significantly reducing legal action”.
It is also promising to improve stakeholder engagement by “listening and responding proactively to feedback from all stakeholder groups and act with humility from a place of genuine care”.
It said it will change its operating model to focus on better customer service and build a sustainable business that is trusted by customers, clients and wider stakeholders.
In April, Collection House entered into a standstill agreement with its lenders, Commonwealth Bank and Westpac, while it attempts to recapitalise the business.
Current lending arrangements with the company’s senior lenders require, among other things, that the company maintains an agreed loan-to-valuation ratio and a rolling leverage ratio (total finance debt for the CLH Group as a ratio of consolidated EBITDA of the CLH Group).
“If changes to the company’s operational strategies affect the accounting value of its PDL assets by deferring or reducing collection cashflows, that is likely to have an adverse impact on the company’s ability to meet the current terms and conditions of those lending arrangements,” the company said.
The lenders agreed not to take any action during the standstill period, which runs until September 30, “in relation to any potential or existing defaults that occurred under the facilities prior to the commencement of the standstill period.”
Last week, Collection House chief executive Doug McAlpine said in a statement that the recapitalisation process was ongoing and that voluntary suspension of trading in the company’s shares would remain in place.