Debt buyer and collector Collection House took a major step in securing its viability last month, when it recapitalised the business, but its financial report for the December half-year shows it is not out of trouble yet.
Revenue fell 42.7 per cent to A$26.5 million, compared with the previous corresponding period, and its loss blew out from $9.5 million in the December half 2020 to a loss of $63.7 million in the latest half.
In an assessment that was surprisingly frank for a piece of corporate communication, the company said trading conditions were “difficult” and the company’s operating performance was “disappointing”.
Activity in the receivables management sector is down, as government stimulus and lender forbearance have interrupted the usual bad debt, debt sale and collection cycle. Commentators keep saying things are getting back to normal but it hasn’t happened yet.
For Collection House, difficult market conditions have come on top of problems managing its debt.
At least it appears to have found a way out of the debt problem, although at some cost.
Last month, the company finalised a recapitalisation plan, its second in three years, agreeing to sell its New Zealand purchased debt ledger to Credit Corp for around $12 million.
Credit Corp will provide Collection house with a short-term working capital facility of $7.5 million, repayable when the NZ PDL sale is completed.
Credit Corp will acquire $52 million of senior debt from Collection House’s lenders. Credit Corp has agreed to a standstill on repayments. When the working capital facility is repaid Credit Corp will release Collection House from all remaining obligations.
In a separate deal, Credit Corp bought Collection House’s Australian purchased debt ledger in December 2020.
Having sold off its PDL operations, Collection House will have to rely in the short term on low-margin collections business as its tries to rebuild.
According to the financial report: “General levels of activity in the receivables management sector over the last six months remained depressed, as clients continued to implement conservative customer engagement strategies in response to the longer than anticipated COVID-19 recovery.
“Collection House is confident that with a return to pre-COVID-19 activity levels and further reduction to fixed overhead costs, the company can return to sustainable profitability.”
It said it bid on a number of debt purchasing opportunities during the half but missed out because prices were “prohibitively high.”
It is trying a new approach to the PDL market, co-investing with third parties. By doing this it hopes to reduce the amount of capital it has to commit and generate higher return on equity.
One unusual aspect of the financial report was that the company “de-recognised” carried forward tax losses. It said that in light of continued difficult trading conditions and a slow recovery timeline, accounting rules required the company to reassess the level of tax losses carried forward as deferred tax assets.
This de-recognition resulted in a $49.7 million charge, which exacerbated the half-year loss. It is still carrying $58.3 million of tax losses, which it expects to be able to use.