Debt Buying Giants Reach New Heights, But Disclose CFPB Investigations and Possible Impacts

Publicly traded debt buyers Encore Capital Group (NASDAQ: ECPG) and PRA Group (NASDAQ: PRAA) recently announced financial results for the full year 2014 marked by record cash collections and revenues driven by acquisitions and global growth. But both also made special note of specific, ongoing CFPB investigations and the potential financial impact of resolving the actions.

San Diego-based Encore late last week reported that it had crossed the $1 billion line in 2014, bringing in $1.07 billion in revenue last year. It marked a 39 percent increase over 2013 revenues. Gross collections from the portfolio purchasing and recovery business grew 26 percent to $1.61 billion, compared to $1.28 billion in 2013.

Net income was $105 million or $3.83 per share, compared to $77 million or $2.94 per share in 2013.

Encore’s growth last year is directly attributable to several major acquisitions, some of which the company closed or initiated in the second half of 2013. The buying spree also saw significant expansion into international ARM markets.

In June 2013, Encore closed the acquisition of rival public debt buyer Asset Acceptance in a deal valued at $200 million. A month later, Encore closed on its purchase of UK debt buyer Cabot Credit Management for $177 million. Both of the acquisitions were integrated in late 2013 with 2014 being the first full year Encore recognized additional revenues from the deals.

Encore also made some moves in 2014 that resulted in additional revenues recognized last year. It made smaller acquisitions in Latin America and UK, announced a very large deal for another UK-based ARM firm Marlin Financial for $480 million, and bought U.S. ARM firm Atlantic Credit & Finance for nearly $200 million in a deal that closed later in 2014.

“Our diversification has positioned us to be able to deploy capital in a number of different asset classes and geographies around the world in order to maximize expected returns,” said CEO Ken Vecchione in Encore’s earnings release. Vecchione also noted that throughout 2014, the “strategic combinations” drove efficiencies and higher levels of productivity.

After its discussion of 2014 results in its annual report SEC filing and on a conference call with investors, Encore disclosed that it is currently engaged in discussions with the staff of the CFPB regarding practices and controls relating to its debt collection practices that may result in the company reaching “a negotiated settlement or become engaged in litigation.” The company said “It is reasonably possible that we could agree to pay penalties or restitution and could recognize a pretax charge in excess of $35 million.”

Encore noted that discussions with CFPB staff involve various aspects of the company’s practices and that “We agree with the staff on some items under discussion and disagree with the staff on others.” The company noted that it will defend its interpretation of the law.

Encore’s primary U.S. competitor, Norfolk, Va.-based PRA Group, reported its earnings after the market closed Monday. PRA said that it also had a record year in 2014, with record revenue of $881 million, an increase of 20 percent from 2013. Cash collections increased 21 percent to $1.38 billion. But the company shouldn’t be too far off from crossing the $1 billion itself; PRA reported fourth quarter 2014 revenue of $250.7 million.

PRA’s net income for the year increased one percent to $176.5 million, or $3.50 per share.

Global expansion also drove PRA’s results last year. In July 2014, PRA completed a massive transaction to acquire European debt buyer Aktiv Kapital. The deal was valued at $1.3 billion, including the assumption of debt.  PRA also expanded its UK operations with the closing of a smaller deal for Pamplona Capital Management.

PRA disclosed that it is the focus of a CFPB investigation in similar fashion to Encore; it was mentioned in the company’s annual report and on a conference call Monday afternoon with investors. PRA noted that its discussions also involved matters on which the company and the Bureau did not see eye-to-eye, saying, “the CFPB has taken positions with respect to legal requirements applicable to debt collection practices with which we disagree.”

PRA said that it has discussed resolution of the investigation “involving possible penalties, restitution in the adoption of new practices and controls and the conduct of our business.” It could also become involved in litigation.

But the PRA disclosure did not make specific mention of an amount that it may have to pay to settle the CFPB matter.

Both Encore and PRA’s CFPB disclosures noted that they are not the only ARM companies being investigated. PRA mentioned specifically that it was responding to a civil investigative demand (CID) from the CFPB and that others had received the same.