Asset Acceptance to Post $15 Million in Revenue Impairments

Debt buyer and collector Asset Acceptance Capital Corp. (Nasdaq: AACC) announced yesterday that it would incur in the third quarter net impairments on its purchased receivables and additional collection expenses in the range of $0.27 to $0.31 per share net of taxes. The net impairments will reduce purchased receivable revenues by $13 million to $15 million, but won’t require a future cash outlay, Asset reported. It expects more than 95 percent of the impairments to come from portfolios acquired in the third quarter of 2005 or earlier.

The news caused investors to dump Asset Acceptance stock which was trading midday today at $10, down 9 percent.

Yesterday’s announcement, in the form of a preliminary third quarter report, comes after a review of the company’s models for projecting future collections on its purchased receivables portfolios. The company now expects to record a net loss in the range of $0.01 to $0.05 per fully diluted share in the quarter, compared to net income of $0.29 per fully diluted share in the third quarter of 2006. The company plans to announce final third quarter results on Nov. 6.

"Although we are not pleased with impairments of this magnitude related to the revision of our estimates of collections on our portfolios and review of our modeling, we believe this action will reduce the likelihood of significant ongoing impairments, resulting in less volatility in our revenue recognition,” Asset President Brad Bradley said in release.

Asset said the projection model review also promoted it to extend the life of many portfolios acquired in 2004 and later up to 84 months, including all non-medical portfolios acquired in 2005 and 2006.

Collections on the debt that Asset Acceptance purchased in 2005 have been “problematic,” Bradley said during a conference call with analysts yesterday. “What we have collected has been disappointing,” said Bradley, who indicated the company may have overpaid for the debt. “If we knew what we were going to collect, we would have priced it differently.” 

Asset said it expects a $6.8 million increase in collections expense for the third quarter compared with the third quarter of 2006, primarily due to an additional $3.7 million in legal costs, $2.1 million in contingent forwarding fees paid for agency and legal outsourced collections, and $600,000 in telecommunications expenses.

Asset reported that interest expense in the quarter would be $3.4 million reflecting the first full quarter of interest expense recognized after the recapitalization of the company in the second quarter of 2007.

Cash collections increased 12.2 percent to $90.7 million in the third quarter of 2007, compared to cash collections of $80.9 million in the third quarter of 2006. Third quarter purchasing remained strong with the company investing $35.3 million to purchase charged-off consumer debt portfolios with a face value of $1.9 billion, or 1.90% of face value, versus prior-year third quarter purchases of $27.1 million invested in charged-off consumer debt portfolios with a face value of $0.8 billion, or 3.54% of face value. The company said all of its purchase data is adjusted for buybacks.

Bradley told analysts yesterday the company currently “continues to see strong collections,” and that “there are good indicators on the supply side “of debt portfolios and “downward indicators on the pricing” of debt.