After spending most of 2020 working to refinance its business, receivables management specialist Collection House is facing more problems with its lenders.
According to the company’s December quarter update, weak conditions in the debt collection market resulted in an adjusted operating cash outflow of A$4.4 million in the quarter (the company made a cashflow gain of $7.9 million but the figure included a $12.3 million tax refund).
CLH said it was negotiating with its banks, Commonwealth Bank and Westpac, for an extension to its existing facilities to allow it to return to positive cashflow. It is also negotiating with “a range of external parties” in relation to the restructure of existing bank facilities and additional working capital funding.
“Subject to successful completion of these negotiations, CLH expects to be able to continue its operations and to meet its business objectives.”
The company’s problems go back to a change to its business model in 2019, following criticism of its collection practices, which affected the accounting value of its assets. This in turn affected its ability to meet the terms and conditions of its loans.
It entered a standstill agreement with its banks in April 2020, after breaching the terms of its financing arrangements.
In October 2020 it sold its purchased debt ledger to Credit Corp, using proceeds of the $160 million sale to pay down bank debt. By December the company had finalised a new $60 million facility with its banks.
Cash flow since then has largely gone to continue paying down debt, so the cashflow loss in the December quarter is a serious problem for the company.
It said it remains confident “that there are significant opportunities to support clients and customers during what has been a protracted COVID-19 recovery phase” but it conceded that results during the quarter “reflected subdued trading conditions across the contingent collection business”.
“Client-initiated COVID-19 forbearance arrangements are continuing to restrict the company’s ability to deliver services, including contacting customers. This continues to impact the scale of commission revenues generated under contingent collection arrangements as well as the commencement of new business activities that have been successfully tendered by CLH but then delayed.
“Contact restrictions implemented by clients in respect of lockdowns in New South Wales, Victoria and New Zealand continued to impact for longer than expected during the quarter.
“While the company is encouraged by the continuing relaxation of COVID-19 related restrictions across Australia and some positive reaction from our clients, with the more recent impact of the Omicron variant we realistically expect disrupted trading conditions to persist at least until the fourth quarter.”