2018 Response to CCP

CHECKMATE RESEARCH RESPONSE TO CREDIT CORP GROUP (ASX: CCP) Credit Corp has failed to address many important points in its response to our Report published on 21 June 2018. Certain explanations, provided by CCP, are misleading and do not address our questions in substance or indeed at all. We see such poor communication from a publicly traded company as a “red flag ” and reiterate our negative view on the company’s share price. We firmly believe that the current business model of CCP, in particular its lending business, may not survive the increased public scrutiny and may have to be reevaluated.

1) CCP has failed to provide any evidence that its Collections/Amortization ratio is not too smooth when compared to peers In its response to our Report, CCP compared itself with the US debt purchasers Encore Capital and PRA Group, which report their financial results under US GAAP. While we believe comparison with Pioneer Credit (ASX:PNC), Collection House (ASX:CLH) and other companies reporting under IFRS is more appropriate, we present collections/amortization collections/amortization ratios for both US peers and CCP below1. The numbers of the US debt purchasers further confirm our view: the collections/amortization collections/amortization ratio of CCP is simply too smooth. PRA Group US$ '000

2014

 

2015

 

20 2016

2017

2010

2011

2012

Collections

368, 368,00 003 3

529, 529,34 342 2

705, 705,49 490 0

908, 908,68 684 4

1,1 1,142 42,4 ,437 37

1,37 1,378, 8,81 812 2

Amortiza ti tio n

124,756

194,510

293,431

371,497

480,913

576,273

645,004

648,388

719,904

2.95

2.72 - 7.7%

2.40 - 11.7%

2.45 1.7%

2.38 - 2.9%

2.39 0.7%

2.39 - 0.2%

2.30 - 3.6%

2.10 - 8.7%

2009

2010

2011

2012

2013

20 2016

2017

Collections

487, 487,45 458 8

604, 604,39 394 4

761, 761,15 158 8

948, 948,05 055 5

1,2 1,279 79,5 ,506 06

1,60 1,607, 7,49 497 7

Amortiza ti tio n

168,416

217,891

301,621

406,864

546,847

632,072

635,052

654,812

714,271

2.89

2.77 - 4.2%

2.52 - 9.0%

2.33 - 7.7%

2.34 0.4%

2.54 8.7%

2.68 5.3%

2.57 - 3.9%

2.47 - 3.9%

2009

2010

2011

2012

2013

20 2016

2017

152, 152,95 950 0

178, 78,806 806

205, 05,289 289

230, 30,442 442

250 250,369

288 288,106 106

288, 288,18 186 6

321 321,989

355, 55,674 674

70,181

87,609

93,127

1 08 08,439

119,451

136,242

135,721

150,887

166,100

2.18

2.04 - 6.4%

2.20 8.0%

2.13 - 3.6%

2..10 2 -1 - 1.4%

2.11 0 .9% 0.

2.12 0.4%

2.13 0.5%

2.14 0.3%

Collec tio ns/Amortization Yo Y c hang e

2013

 

2009

1,5 1,539 39,4 ,495 95 1,49 1,491, 1,98 986 6

1,5 1,512 12,6 ,605 05

Encore Capital Group US$ '000

Collec tio ns/Amortization Yo Y c hang e

 

2014

 

2015

 

1,7 1,700 00,7 ,725 25 1,68 1,685, 5,60 604 4

1,7 1,767 67,6 ,644 44

Credit Corp AU$ '000 Collections

Amortiza tio n

Collec tio ns/Amortization Yo Y c hang e

 

 

 

2014

 

2015

 

Source: Companies’ filings

1

 See Appendix 1 for sources of data used to calculate Collections/Amortization ratio for the US debt purchasers

During 2014-2017 Collections/Amortization ratios of the US debt purchasers were much more volatile compared to CCP. Below is a quote from CCP ’s response to our Report: Like Credit Corp, the collection multiples implied by the ra tes of amortization reported by these peers (PRA Group and Encore Capital –  Checkmate  Checkmate Research) over the last four years have not varied by more than 5%.

This statement is false. As can be seen in the table above, the variation of Collections/Amortization ratio for Credit Corp over Corp over the last 4 years has not no t exceeded 0.9%. 0.9%. At the same time, variations of Collection/Amortization Collection/Amortization ratios for PRA Group and Group and Encore Capital Group reached Group reached 8.7% (10x 8.7% (10x bigger than CCP) over the same period. We believe these numbers support our view that CCP is managing its revenue in its largest business segment – purchased debt ledger (PDL) segment. Such accounting techniques mislead investors regarding regarding the underlying performance of the PDL business. Moreover, CCP has not provided a reasonable answer as to why the Collections/Amortization Collections/Amortization ratio, as well as the net profit margin, despite being volatile historically, have almost leveled off since FY 2014-2015. 2014-2015. We have not found a similar pattern in the financial results of its peers. In our view, CCP may have started to manage its earnings around this time.

2) CCP has failed to address our point regarding the allocation of c. AU$50M of consumer loans to the debt purchasing/collection purchasing/collection segment in the second half of FY 2016 In its response CCP stated that it “has not reclassified assets”. This answer is highly misleading. We have neither used the word “reclassified” in our Report nor implied any reclassification of assets. We have asked the

following question: why did CCP allocate c. AU$50M AU$50M of consumer loans (almost half of the total loan book as of 30 June 2016) to the debt purchasing/debt collection segment instead of the consumer lending segment? Why did CCP not explain this material transaction transaction to its shareholders? Furthermore, Furthermore, CCP has failed to explain why the company stopped providing disclosures on segment assets in H1 FY 2018.

3) According to CCP “Credit Corp has placed itself at a considerable economic disadvantage to competitors in order to provide consumers with access to a more sustainable product”

CCP has failed to address our point that if Wallet Wizard would be classified as a payday lender from a legal standpoint, this would cut off bank financing from the whole business, including PDL purchasing, and would increase regulatory scrutiny from Australian Securities and Investments Commission (ASIC). As we pointed out in our Report, payday lenders generally do not compete on price, as consumers choose a payday loan mostly based on qualitative factors like the ease of getting a loan. This loan. This is the reason why most payday lenders price their loans at or near the interest rate cap, imposed by the local legislation. So the intent i ntent to provide consumers with access to a more sustainable (cheap) product does not seem to be the main reason, why CCP abandoned small amount credit contract (SACC) lending while continuing to provide a financial product, which is suspiciously similar to a payday loan.

4) According to CCP “Credit Corp is an ethical operator” While SACC lenders have obligation to inform potential borrowers regarding the risks, associated with taking payday loans, Wallet Wizard avoids meeting such obligations. obligations. Below is a standard message, which appears during a SACC loan application process: process:

Source: Money3

We have conducted a comprehensive review of the Wallet Wall et Wizard website and could not find any similar message. We understand that that by not being classified as a payday lender, Wallet Wizard does not have a legal obligation to properly inform its potential borrowers. However, an ethical lender would voluntarily comply with this requirement, given that consumers, consumers, targeted by the company, would need such information to make an informed decision. An application for a payday loan and a rejection in a pa yday loan can negatively affect a person’s credit file and can have an impact on the ability of such persons to access credit in the future. We believe that an ethical and responsible lender should disclose on its website, which applicants are not eligible to receive a loan.

5) According to CCP “Credit Corp is not exploiting any legal loophole” Typically, when being approved for a line li ne of credit, a borrower b orrower would expect to be able to access funds within his or her credit limit, at any time. This is not the case with Wallet Wizard. Below we present evidence that borrowers of Wallet Wizard are being regularly regularly rejected in a redraw despite being granted a “credit line”. This is yet another evidence that a “credit line” from Wallet Wizard is a camouflaged payday loan.

Source: productreview.com.au Source: productreview.com.au

Source: productreview.com.au Source: productreview.com.au

Source: productreview.com.au Source: productreview.com.au

We ask CCP the following questions:  

What share of its borrowers applied for a redraw in FY 2017? What share of these applications was rejected?

6) CCP has been avoiding mentioning Westpac as its business partner in the public communications and filings since Feb 2016 A company trying to deemphasize its relationship with the large and i mportant business business partner looks very unusual. The last time, we found CCP mentioning Westpac in its public filings beyond the biographies of the Board directors, was a press-release dated 18 Feb 2016 2. In June 2017 CCP obtained an AU$85M credit facility from Westpac, but chose not to issue a press-release on this major event. CCP has not mentioned Westpac in its response to our Report.

7) We are yet to see a reaction from Westpac We would like to know, why one the country’s leading banks – Westpac – does not follow its own policy on payday lending. What is the bank’s position on payday lending as of today ? We would also like to know whether the chairman of Westpac, Lindsay Maxsted, Maxsted, was sincere, when he highlighted the need to improve the B ank’s reputation during Annual General Meeting in December 2017.

2

 See Appendix 2

APPENDIX 1 Encore Capital Group 2017 10-K 3:

Encore Capital Group 2017 10-K:

3

 Portfolio amortization for Encore Capital was calculated as Gross collections less Revenue

APPENDIX 2

Source: asx.com.au