The beginning of the end for debt buyer Collection House was in August 2019, 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 Australian Taxation Office made more bankruptcy petitions.
That report set off a chain of events that led to yesterday’s announcement that the company has gone into voluntary administration. The directors appointed John Park, Ben Campbell and Kelly Trenfield of FTI Consulting as administrators.
“The decision comes after exhaustive attempts to restructure the business and raise additional funding were unsuccessful,” the board said in a statement to the ASX.
The 2019 report on debt collection practices 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.”
The report had an immediate impact. Lenders and other creditors stopped or threatened to stop using Lion Finance because they did not want to be associated with such poor practice.
Collection House had to respond and in November of that year it announced that it had increased the threshold at which it would consider recovery by bankruptcy, moving from the regulatory limit of A$5000 to $20,000.
It said it was undertaking a review of its operating model and collection strategies, and in a statement to the ASX it said it was considering “how it might further respond to the continuing development and evolution of its operating environment.”
Changes to the company’s collection practices affected the accounting value of its purchased debt ledger assets by deferring or reducing collection cash flows. It wrote off $89.9 million of the value of its PDL assets in the December 2019 half-year and made a loss of $47.3 million.
This, in turn, had an adverse impact on the company’s ability to meet the terms and conditions of its lending arrangements.
Loan covenants included requirements that the company maintain 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).
In April 2020, Collection House entered into a standstill agreement with its lenders, Commonwealth Bank and Westpac, while it attempted to recapitalise the business. The standstill agreement was to run until September of that year. Its debt was around $200 million.
It missed the September refinancing deadline and missed a revised deadline a month later.
In December 2020, it sold its purchased debt ledger to Credit Corp, with proceeds used to pay down debt. It retained a PDL portfolio in New Zealand its collection agency operation.
It limped through 2021, using any available cash flow to pay down