Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex312.htm |
| EX-31.1 - EXHIBIT 31.1 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex311.htm |
| EX-10.12 - EXHIBIT 10.12 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex1012.htm |
| EX-10.11 - EXHIBIT 10.11 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex1011.htm |
| EX-10.10 - EXHIBIT 10.10 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex1010.htm |
| EX-10.9 - EXHIBIT 10.9 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex109.htm |
| EX-10.8 - EXHIBIT 10.8 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex108.htm |
| EX-4.6 - EXHIBIT 4.6 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex46.htm |
| EX-4.5 - EXHIBIT 4.5 - ENCORE CAPITAL GROUP INC | ecpg-20180930ex45.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________________________________
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________to__________.
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 48-1090909 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
3111 Camino Del Rio North, Suite 103 San Diego, California | 92108 |
(Address of principal executive offices) | (Zip code) |
(877) 445 - 4581
(Registrant’s telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)
_______________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at October 31, 2018 | |
Common Stock, $0.01 par value | 30,852,178 shares | |
ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
Page | |
Condensed Consolidated Statements of Operations | |
Condensed Consolidated Statement of Equity | |
PART I – FINANCIAL INFORMATION
Item 1—Condensed Consolidated Financial Statements (Unaudited)
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)
September 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 204,649 | $ | 212,139 | |||
Investment in receivable portfolios, net | 3,109,116 | 2,890,613 | |||||
Deferred court costs, net | 94,017 | 79,963 | |||||
Property and equipment, net | 96,429 | 76,276 | |||||
Other assets | 244,602 | 302,728 | |||||
Goodwill | 898,591 | 928,993 | |||||
Total assets | $ | 4,647,404 | $ | 4,490,712 | |||
Liabilities and Equity | |||||||
Liabilities: | |||||||
Accounts payable and accrued liabilities | $ | 274,213 | $ | 284,774 | |||
Debt, net | 3,561,467 | 3,446,876 | |||||
Other liabilities | 33,279 | 35,151 | |||||
Total liabilities | 3,868,959 | 3,766,801 | |||||
Commitments and contingencies | |||||||
Redeemable noncontrolling interest | 1,231 | 151,978 | |||||
Equity: | |||||||
Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding | — | — | |||||
Common stock, $.01 par value, 50,000 shares authorized, 30,852 shares and 25,801 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 309 | 258 | |||||
Additional paid-in capital | 207,985 | 42,646 | |||||
Accumulated earnings | 673,153 | 616,314 | |||||
Accumulated other comprehensive loss | (103,394 | ) | (77,356 | ) | |||
Total Encore Capital Group, Inc. stockholders’ equity | 778,053 | 581,862 | |||||
Noncontrolling interest | (839 | ) | (9,929 | ) | |||
Total equity | 777,214 | 571,933 | |||||
Total liabilities, redeemable equity and equity | $ | 4,647,404 | $ | 4,490,712 | |||
The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See Note 10, “Variable Interest Entities” for additional information on the Company’s VIEs.
September 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 471 | $ | 88,902 | |||
Investment in receivable portfolios, net | 444,503 | 1,342,300 | |||||
Deferred court costs, net | — | 26,482 | |||||
Property and equipment, net | — | 23,138 | |||||
Other assets | 8,212 | 122,263 | |||||
Goodwill | — | 724,054 | |||||
Liabilities | |||||||
Accounts payable and accrued liabilities | $ | 3,514 | $ | 151,208 | |||
Debt, net | 390,690 | 2,014,202 | |||||
Other liabilities | — | 1,494 | |||||
See accompanying notes to condensed consolidated financial statements
3
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues | |||||||||||||||
Revenue from receivable portfolios | $ | 295,357 | $ | 264,024 | $ | 869,028 | $ | 777,269 | |||||||
Other revenues | 37,388 | 23,111 | 112,809 | 61,763 | |||||||||||
Total revenues | 332,745 | 287,135 | 981,837 | 839,032 | |||||||||||
Allowance reversals on receivable portfolios, net | 4,029 | 19,564 | 31,472 | 30,525 | |||||||||||
Total revenues, adjusted by net allowances | 336,774 | 306,699 | 1,013,309 | 869,557 | |||||||||||
Operating expenses | |||||||||||||||
Salaries and employee benefits | 95,634 | 77,232 | 275,853 | 221,296 | |||||||||||
Cost of legal collections | 50,473 | 48,094 | 155,583 | 149,460 | |||||||||||
Other operating expenses | 30,691 | 25,859 | 103,478 | 76,249 | |||||||||||
Collection agency commissions | 10,682 | 10,622 | 34,587 | 33,678 | |||||||||||
General and administrative expenses | 41,893 | 32,500 | 123,163 | 102,750 | |||||||||||
Depreciation and amortization | 9,873 | 8,522 | 31,232 | 25,819 | |||||||||||
Total operating expenses | 239,246 | 202,829 | 723,896 | 609,252 | |||||||||||
Income from operations | 97,528 | 103,870 | 289,413 | 260,305 | |||||||||||
Other (expense) income | |||||||||||||||
Interest expense | (65,094 | ) | (52,755 | ) | (183,092 | ) | (152,469 | ) | |||||||
Other (expense) income | (2,539 | ) | 8,873 | (4,961 | ) | 12,004 | |||||||||
Total other expense | (67,633 | ) | (43,882 | ) | (188,053 | ) | (140,465 | ) | |||||||
Income from continuing operations before income taxes | 29,895 | 59,988 | 101,360 | 119,840 | |||||||||||
Provision for income taxes | (16,879 | ) | (17,844 | ) | (37,657 | ) | (43,442 | ) | |||||||
Income from continuing operations | 13,016 | 42,144 | 63,703 | 76,398 | |||||||||||
Loss from discontinued operations, net of tax | — | — | — | (199 | ) | ||||||||||
Net income | 13,016 | 42,144 | 63,703 | 76,199 | |||||||||||
Net loss (income) attributable to noncontrolling interest | 7,709 | (13,950 | ) | 5,147 | (5,652 | ) | |||||||||
Net income attributable to Encore Capital Group, Inc. stockholders | $ | 20,725 | $ | 28,194 | $ | 68,850 | $ | 70,547 | |||||||
Amounts attributable to Encore Capital Group, Inc.: | |||||||||||||||
Income from continuing operations | $ | 20,725 | $ | 28,194 | $ | 68,850 | $ | 70,746 | |||||||
Loss from discontinued operations, net of tax | — | — | — | (199 | ) | ||||||||||
Net income | $ | 20,725 | $ | 28,194 | $ | 68,850 | $ | 70,547 | |||||||
Earnings (loss) per share attributable to Encore Capital Group, Inc.: | |||||||||||||||
Basic earnings (loss) per share from: | |||||||||||||||
Continuing operations | $ | 0.69 | $ | 1.08 | $ | 2.52 | $ | 2.73 | |||||||
Discontinued operations | — | — | — | (0.01 | ) | ||||||||||
Net basic earnings per share | $ | 0.69 | $ | 1.08 | $ | 2.52 | $ | 2.72 | |||||||
Diluted earnings (loss) per share from: | |||||||||||||||
Continuing operations | $ | 0.69 | $ | 1.05 | $ | 2.49 | $ | 2.68 | |||||||
Discontinued operations | — | — | — | (0.01 | ) | ||||||||||
Net diluted earnings per share | $ | 0.69 | $ | 1.05 | $ | 2.49 | $ | 2.67 | |||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 29,867 | 26,011 | 27,372 | 25,957 | |||||||||||
Diluted | 30,121 | 26,736 | 27,663 | 26,406 | |||||||||||
See accompanying notes to condensed consolidated financial statements
4
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, In Thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 13,016 | $ | 42,144 | $ | 63,703 | $ | 76,199 | |||||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||
Change in unrealized gains/losses on derivative instruments: | |||||||||||||||
Unrealized (loss) gain on derivative instruments | (1,152 | ) | (264 | ) | (3,306 | ) | 1,170 | ||||||||
Income tax effect | 284 | 103 | 823 | (409 | ) | ||||||||||
Unrealized (loss) gain on derivative instruments, net of tax | (868 | ) | (161 | ) | (2,483 | ) | 761 | ||||||||
Change in foreign currency translation: | |||||||||||||||
Unrealized (loss) gain on foreign currency translation | (6,919 | ) | 9,712 | (23,436 | ) | 32,000 | |||||||||
Other comprehensive (loss) income, net of tax | (7,787 | ) | 9,551 | (25,919 | ) | 32,761 | |||||||||
Comprehensive income | 5,229 | 51,695 | 37,784 | 108,960 | |||||||||||
Comprehensive (income) loss attributable to noncontrolling interest: | |||||||||||||||
Net loss (income) | 7,709 | (13,950 | ) | 5,147 | (5,652 | ) | |||||||||
Unrealized loss (gain) on foreign currency translation | 1,293 | (594 | ) | (119 | ) | (2,003 | ) | ||||||||
Comprehensive loss (income) attributable to noncontrolling interest | 9,002 | (14,544 | ) | 5,028 | (7,655 | ) | |||||||||
Comprehensive income attributable to Encore Capital Group, Inc. stockholders | $ | 14,231 | $ | 37,151 | $ | 42,812 | $ | 101,305 | |||||||
See accompanying notes to condensed consolidated financial statements
5
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statement of Equity
(In Thousands)
Common Stock | Additional Paid-In Capital | Accumulated Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total Equity | |||||||||||||||||||||
Shares | Par | |||||||||||||||||||||||||
Balance at December 31, 2017 | 25,801 | $ | 258 | $ | 42,646 | $ | 616,314 | $ | (77,356 | ) | $ | (9,929 | ) | $ | 571,933 | |||||||||||
Net income (loss) | — | — | — | 68,850 | — | (969 | ) | 67,881 | ||||||||||||||||||
Other comprehensive (loss) gain, net of tax | — | — | — | — | (26,038 | ) | 433 | (25,605 | ) | |||||||||||||||||
Change in fair value of redeemable noncontrolling interest | — | — | 19,430 | (12,011 | ) | — | — | 7,419 | ||||||||||||||||||
Purchase of noncontrolling interest | — | — | — | — | — | 9,626 | 9,626 | |||||||||||||||||||
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes | 132 | 2 | (1,934 | ) | — | — | — | (1,932 | ) | |||||||||||||||||
Issuance of common stock | 4,920 | 49 | 181,138 | — | — | — | 181,187 | |||||||||||||||||||
Stock-based compensation | — | — | 10,452 | — | — | — | 10,452 | |||||||||||||||||||
Issuance of exchangeable notes | — | — | 14,009 | — | — | — | 14,009 | |||||||||||||||||||
Exchangeable notes hedge transactions | — | — | (17,785 | ) | — | — | — | (17,785 | ) | |||||||||||||||||
Net equity adjustment on Cabot Transaction | — | — | (43,097 | ) | — | — | — | (43,097 | ) | |||||||||||||||||
Other | — | — | 3,126 | — | — | — | 3,126 | |||||||||||||||||||
Balance at September 30, 2018 | 30,853 | $ | 309 | $ | 207,985 | $ | 673,153 | $ | (103,394 | ) | $ | (839 | ) | $ | 777,214 | |||||||||||
6
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Operating activities: | |||||||
Net income | $ | 63,703 | $ | 76,199 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Loss from discontinued operations, net of income taxes | — | 199 | |||||
Depreciation and amortization | 31,232 | 25,819 | |||||
Other non-cash expense, net | 30,453 | 24,768 | |||||
Stock-based compensation expense | 10,452 | 7,041 | |||||
Loss (gain) on derivative instruments, net | 10,648 | (2,714 | ) | ||||
Deferred income taxes | 18,733 | (5,396 | ) | ||||
Allowance reversals on receivable portfolios, net | (31,472 | ) | (30,525 | ) | |||
Other, net | (9,690 | ) | 330 | ||||
Changes in operating assets and liabilities | |||||||
Deferred court costs and other assets | (19,537 | ) | (20,094 | ) | |||
Prepaid income tax and income taxes payable | 21,419 | 15,565 | |||||
Accounts payable, accrued liabilities and other liabilities | (5,919 | ) | (9,501 | ) | |||
Net cash provided by operating activities | 120,022 | 81,691 | |||||
Investing activities: | |||||||
Cash paid for acquisitions, net of cash acquired | — | (5,623 | ) | ||||
Purchases of receivable portfolios, net of put-backs | (881,789 | ) | (739,478 | ) | |||
Collections applied to investment in receivable portfolios, net | 615,010 | 549,544 | |||||
Purchases of property and equipment | (37,436 | ) | (20,518 | ) | |||
(Payment) proceeds from derivative instruments, net | (28,656 | ) | 6,140 | ||||
Other, net | 6,800 | 2,155 | |||||
Net cash used in investing activities | (326,071 | ) | (207,780 | ) | |||
Financing activities: | |||||||
Payment of loan costs | (6,440 | ) | (19,910 | ) | |||
Proceeds from credit facilities | 766,471 | 928,141 | |||||
Repayment of credit facilities | (465,666 | ) | (972,453 | ) | |||
Proceeds from senior secured notes | — | 325,000 | |||||
Repayment of senior secured notes | (1,029 | ) | (203,212 | ) | |||
Proceeds from issuance of convertible senior notes | 172,500 | 150,000 | |||||
Repayment of convertible senior notes | — | (60,406 | ) | ||||
Proceeds from convertible hedge instruments | — | 5,580 | |||||
Proceeds from other debt | 9,090 | 8,318 | |||||
Repayment of other debt | (23,450 | ) | (4,309 | ) | |||
Payment for the purchase of PECs and noncontrolling interest | (234,101 | ) | — | ||||
Payment of direct and incremental costs relating to Cabot Transaction | (8,622 | ) | — | ||||
Other, net | (3,826 | ) | (1,440 | ) | |||
Net cash provided by financing activities | $ | 204,927 | 155,309 | ||||
Net (decrease) increase in cash and cash equivalents | (1,122 | ) | 29,220 | ||||
Effect of exchange rate changes on cash and cash equivalents | (6,368 | ) | 9,261 | ||||
Cash and cash equivalents, beginning of period | 212,139 | 149,765 | |||||
Cash and cash equivalents, end of period | $ | 204,649 | $ | 188,246 | |||
See accompanying notes to condensed consolidated financial statements
7
ENCORE CAPITAL GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings.
Encore’s subsidiary Midland Credit Management (together with its subsidiaries and domestic affiliates, “Midland”) is a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Cabot Credit Management plc (together with its subsidiaries, “Cabot”), Encore’s largest international subsidiary, is one of the largest credit management services providers in Europe and is a market leader in the United Kingdom and Ireland. Previously, Encore controlled Cabot via its majority ownership interest in the indirect holding company of Cabot, Janus Holdings S.a r.l. (“Janus Holdings”). On July 24, 2018, the Company completed the purchase of all the outstanding interests of Cabot not owned by the Company. As a result, Cabot became a wholly owned subsidiary of Encore. These are the Company’s primary operations.
Financial Statement Preparation and Presentation
The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements have been prepared in conformity with GAAP and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates variable interest entities (“VIE”s), for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note 10, “Variable Interest Entities,” for further details. All intercompany transactions and balances have been eliminated in consolidation.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Translation gains or losses are the material components of accumulated other comprehensive income or loss. Transaction gains and losses are included in other income or expense.
8
Reclassifications
Certain immaterial reclassifications have been made to the condensed consolidated financial statements to conform to the current year’s presentation.
Change in Accounting Principle
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606” or “ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s Accounting Standards Codification (“ASC”). Under the prior accounting standard, the Company recognized revenue when there was persuasive evidence of an arrangement, the sales price was fixed or determinable, the services had been performed and collectability was reasonably assured.
The Company’s investment in receivable portfolios is outside of the scope of Topic 606 since it is accounted for in accordance with ASC 310-30. Certain of the Company’s international subsidiaries earn fee-based income by providing portfolio management services to credit originators for non-performing loans. Performance obligations for this revenue stream under the new standard primarily arise from debt collection and management activities. These performance obligations are typically satisfied when services are performed, or debt is collected. Consideration is typically variable based on indeterminate volumes or collection activity. Under the new accounting standard, revenue is recognized over time as a series of single performance obligations when the Company is entitled to a percentage of collections received, since the customer simultaneously receives and consumes the benefits provided by the Company’s performance of debt collection and management. The method for measuring progress towards satisfying a performance obligation is based on transaction volumes or debt collected, depending on whether the contract is based on services performed or based on commissions. Costs to fulfill a contract are expensed when incurred.
The Company adopted the requirements of Topic 606 as of January 1, 2018, utilizing the modified retrospective method of transition and elected to apply the revenue standard only to contracts that were not completed as of the adoption date. Prior periods were not restated. The cumulative effect of adopting this new standard had no impact to retained earnings. The impact of adopting Topic 606 on the Company’s revenue is not material to any of the periods presented. Fee-based income is included in “Other Revenues” in the Company’s consolidated statements of operations.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities—Derivatives and Hedging (“Topic 815” or “ASU 2017-12”) which amends the hedge accounting recognition and presentation requirements in ASC 815. ASU 2017-12 improves Topic 815 by simplifying and expanding the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies its application through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, ASU 2017-12 prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. For public entities, ASU 2017-12 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted in any interim period or fiscal year. The Company early adopted ASU 2017-12 as of the second quarter of 2018 retroactive to January 1, 2018. The adoption of the new standard did not have a material effect on the Company’s financial position, results of operations, or required presentations.
Recent Accounting Pronouncements
Other than the adoption of the standards discussed above, there have been no new accounting pronouncements made effective during the three and nine months ended September 30, 2018 that have significance, or potential significance, to the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Effective
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure
9
that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairments tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company did not early adopt this guidance for its annual goodwill impairment testing and does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 applies a current expected credit loss model which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under ASC 310-30, which provides authoritative guidance for the accounting of the Company’s investment in receivable portfolios. Under this new standard, entities will gross up the initial amortized cost for the purchased financial assets with credit deterioration (“PCD assets”), the initial amortized cost will be the sum of (1) the purchase price and (2) the estimate of credit losses as of the date of acquisition. After initial recognition of PCD assets and the related allowance, any change in estimated cash flows (favorable or unfavorable) will be immediately recognized in the income statement because the yield on PCD assets would be locked. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 with early adoption permitted for reporting periods beginning after December 15, 2018. The guidance will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which ASU 2016-13 is adopted. However, the FASB has determined that financial assets for which the guidance in Subtopic 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality, has previously been applied should prospectively apply the guidance in ASU 2016-13 for PCD assets. A prospective transition approach should be used for PCD assets where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. This transition relief will avoid the need for a reporting entity to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-than insignificant credit deterioration since origination. The transition relief also will allow an entity to accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date of ASU 2016-13. The same transition requirements should be applied to beneficial interests that previously applied Subtopic 310-30 or have a significant difference between contractual cash flows and expected cash flows. The Company is in the process of determining the effects the adoption of ASU 2016-13 will have on its consolidated financial statements. The Company expects ASU 2016-13 could have a significant impact on how it measures and records income recognized on its receivable portfolios. The Company has established a project management team and is in the process of developing its accounting policy, evaluating the impact of this pronouncement and researching software resources that could assist with the implementation.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 changes accounting for leases and requires lessees to recognize the assets and liabilities arising from most leases, including those classified as operating leases under previous accounting guidance, on the balance sheet and requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, ASU 2018-11, Leases: Targeted Improvements, was issued to provide relief to companies from restating comparative periods. Pursuant to ASU 2018-11, in the period of adoption, the Company will not restate comparative periods presented in its financial statements. The new guidance will be effective for the Company starting in the first quarter of fiscal year 2019. Early adoption is permitted; however, the Company does not intend to early adopt. The Company is developing an inventory of all leases, accumulating the lease data necessary to apply the amended guidance and is in the process of determining the effects the adoption will have on its consolidated financial statements, systems and processes. The Company has selected a software to assist with implementation to the standard.
With the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company’s consolidated financial statements.
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Note 2: Earnings Per Share
Basic earnings or loss per share is calculated by dividing net earnings or loss attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the dilutive effect of the convertible senior notes, if applicable.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
Weighted average common shares outstanding—basic | 29,867 | 26,011 | 27,372 | 25,957 | |||||||
Dilutive effect of stock-based awards | 254 | 271 | 291 | 214 | |||||||
Dilutive effect of convertible senior notes | — | 454 | — | 235 | |||||||
Weighted average common shares outstanding—diluted | 30,121 | 26,736 | 27,663 | 26,406 | |||||||
Anti-dilutive employee stock options outstanding were approximately 13,000 during each of the three and nine months ended September 30, 2018. Anti-dilutive employee stock options outstanding were approximately 13,000 and 138,000 during the three and nine months ended September 30, 2017, respectively.
Note 3: Cabot Transaction
On July 24, 2018, the Company completed the purchase of all the outstanding interests of Cabot not owned by the Company (the “Cabot Transaction”). As a result, Cabot became a wholly owned subsidiary of Encore. The acquisition of the remaining interest was accounted for as an equity transaction and no gain or loss was recognized in the Company’s consolidated statements of operations but was reflected as a component of additional paid-in capital in the consolidated statement of equity. Additionally, in accordance with authoritative guidance and the Company’s policy, the direct and incremental costs associated with the Cabot Transaction were accounted for as part of the equity transaction. Total consideration transferred was approximately $414.7 million, which consisted of cash of $234.1 million and the equivalent of $180.6 million of Encore common stock based on the last reported sale price of Encore common stock per share of $36.80 on July 24, 2018.
(in thousands) | |||
Cash consideration | $ | 234,101 | |
Stock consideration | 180,559 | ||
Total consideration transferred | 414,660 | ||
Less: Preferred equity certificates acquired | (262,512 | ) | |
Consideration transferred to acquire remaining equity interest | 152,148 | ||
Less: Carrying value of redeemable noncontrolling interest | (127,299 | ) | |
Less: Carrying value of noncontrolling interest | 9,626 | ||
Net loss directly recorded in equity | 34,475 | ||
Direct and incremental transaction costs | 8,622 | ||
Total reduction in additional paid-in capital | $ | 43,097 | |
Note 4: Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
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• | Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
• | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
• | Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions. |
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements as of September 30, 2018 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | |||||||||||||||
Interest rate swap agreements | $ | — | $ | 5 | $ | — | $ | 5 | |||||||
Interest rate cap contracts | — | 2,445 | — | 2,445 | |||||||||||
Liabilities | |||||||||||||||
Foreign currency exchange contracts | — | (1,408 | ) | — | (1,408 | ) | |||||||||
Contingent consideration | — | — | (7,417 | ) | (7,417 | ) | |||||||||
Temporary Equity | |||||||||||||||
Redeemable noncontrolling interest | — | — | (1,231 | ) | (1,231 | ) | |||||||||
Fair Value Measurements as of December 31, 2017 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | |||||||||||||||
Foreign currency exchange contracts | $ | — | $ | 1,912 | $ | — | $ | 1,912 | |||||||
Interest rate cap contracts | — | 3,922 | — | 3,922 | |||||||||||
Liabilities | |||||||||||||||
Foreign currency exchange contracts | — | (1,110 | ) | — | (1,110 | ) | |||||||||
Interest rate swap agreements | — | (7 | ) | — | (7 | ) | |||||||||
Contingent consideration | — | — | (10,612 | ) | (10,612 | ) | |||||||||
Temporary Equity | |||||||||||||||
Redeemable noncontrolling interest | — | — | (151,978 | ) | (151,978 | ) | |||||||||
Derivative Contracts:
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Contingent Consideration:
The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date. The Company reviewed the earn-out analysis during the three and nine months ended September 30, 2018 and determined that, based on actual and forecasted operating performance, the expected future earn-out payments would remain the same and be reduced by approximately $4.7 million, respectively. As of September 30, 2018, the aggregated fair value of the contingent consideration was approximately $7.4 million.
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The following table provides a roll forward of the fair value of contingent consideration for the periods ended September 30, 2018 and December 31, 2017 (in thousands):
Amount | |||
Balance at December 31, 2016 | $ | 2,531 | |
Issuance of contingent consideration in connection with acquisition | 10,808 | ||
Change in fair value of contingent consideration | (2,465 | ) | |
Payment of contingent consideration | (781 | ) | |
Effect of foreign currency translation | 519 | ||
Balance at December 31, 2017 | 10,612 | ||
Issuance of contingent consideration in connection with acquisition | 1,728 | ||
Change in fair value of contingent consideration | (4,652 | ) | |
Payment of contingent consideration | (232 | ) | |
Effect of foreign currency translation | (39 | ) | |
Balance at September 30, 2018 | $ | 7,417 | |
Redeemable Noncontrolling Interest:
Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interest subject to this arrangement is included in temporary equity as redeemable noncontrolling interest and is adjusted to its estimated redemption amount each reporting period. Future reductions in the carrying amount are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interest at the time it was originally recorded. The recorded value of the redeemable noncontrolling interest cannot go below the floor level. Adjustments to the carrying amount of redeemable noncontrolling interest are charged to retained earnings (or to additional paid-in capital if there are no retained earnings) and do not affect net income or comprehensive income in the consolidated financial statements.
On July 24, 2018, in connection with the Cabot Transaction, the Company purchased the outstanding redeemable noncontrolling interest held by Cabot’s previous minority shareholders for approximately $127.3 million.
The components of the change in the redeemable noncontrolling interest for the periods ended September 30, 2018 and December 31, 2017 are presented in the following table (in thousands):
Amount | |||
Balance at December 31, 2016 | $ | 45,755 | |
Addition to redeemable noncontrolling interest | 277 | ||
Net loss attributable to redeemable noncontrolling interest | (4,905 | ) | |
Adjustment of the redeemable noncontrolling interest to fair value | 108,296 | ||
Effect of foreign currency translation attributable to redeemable noncontrolling interest | 2,555 | ||
Balance at December 31, 2017 | 151,978 | ||
Redemption of redeemable noncontrolling interest | (138,835 | ) | |
Net loss attributable to redeemable noncontrolling interest | (4,178 | ) | |
Adjustment of the redeemable noncontrolling interest to fair value | (7,419 | ) | |
Effect of foreign currency translation attributable to redeemable noncontrolling interest | (315 | ) | |
Balance at September 30, 2018 | $ | 1,231 | |
Non-Recurring Fair Value Measurement:
Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined using Level 2 measurements. The fair value estimate of the assets held for sale was approximately $26.2 million and $18.7 million as of September 30, 2018 and December 31, 2017, respectively.
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Financial Instruments Not Required To Be Carried At Fair Value
Investment in Receivable Portfolios:
The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios using Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
In the Company’s current analysis, the fair value of investment in receivable portfolios was approximately $3,041.9 million and $3,415.3 million as of September 30, 2018 and December 31, 2017, respectively, as compared to the carrying value of $3,109.1 million and $2,890.6 million as of September 30, 2018 and December 31, 2017, respectively. A 100 basis point increase in the cost to collect and discount rate used would result in a decrease in the fair value of U.S. and European portfolios by approximately $56.5 million and $76.5 million, respectively, as of September 30, 2018. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount which could be realized if its investment in receivable portfolios were sold.
Deferred Court Costs:
The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs approximates fair value.
Debt:
The majority of the Company’s borrowings are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities, and Cabot’s borrowings under its revolving credit facility.
Encore’s convertible notes and exchangeable notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible notes and exchangeable notes was $616.6 million and $450.8 million, net of the debt discount of $39.4 million and $32.7 million as of September 30, 2018 and December 31, 2017, respectively. The fair value estimate for these convertible notes and exchangeable notes, which incorporates quoted market prices using Level 2 inputs, was approximately $650.4 million and $520.9 million as of September 30, 2018 and December 31, 2017, respectively.
Cabot’s senior secured notes are carried at historical cost, adjusted for the debt discount and debt premium. The carrying value of Cabot’s senior secured notes was $1,218.8 million and $1,214.6 million, net of the debt discount of $1.7 million and $1.9 million as of September 30, 2018 and December 31, 2017, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was $1,207.1 million and $1,258.9 million as of September 30, 2018 and December 31, 2017, respectively.
Note 5: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.
During the second quarter of 2018, the Company early adopted ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities retroactive to January 1, 2018 with no material impact to its financial statements. Periods prior to January 1, 2018 have not been restated. The Company applies hedge accounting when derivatives are designated, qualified and highly effective as hedges. Effectiveness is formally assessed and documented at inception and each period throughout the life of a hedge using various qualitative or quantitative methods appropriate for each hedge. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in shareholders’ net income. Changes in the fair value of a derivative instrument may not always equal changes in the fair value of the hedged item. This is referred to as “hedge ineffectiveness” and, with the adoption of ASU 2017-12, is no longer measured and reported separately from the effective portion of the hedge. The Company excludes certain components of derivative instruments’ changes in fair value from the assessment of hedge effectiveness. With the adoption of ASU 2017-12, those
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excluded components are initially recorded in other comprehensive income and recognized in shareholders’ net income over the life of the derivative instrument. The Company did not record a cumulative-effect adjustment on January 1, 2018 (that would have impacted retained earnings and accumulated other comprehensive income by the same amount upon adoption) because there was no ineffectiveness recognized for hedges existing at that date.
The following table summarizes the fair value of derivative instruments as recorded in the Company’s condensed consolidated statements of financial condition (in thousands):
September 30, 2018 | December 31, 2017 | ||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Derivatives designated as hedging instruments: | |||||||||||
Foreign currency exchange contracts | Other assets | $ | — | Other assets | $ | 1,912 | |||||
Foreign currency exchange contracts | Other liabilities | (1,408 | ) | Other liabilities | — | ||||||
Interest rate swap agreements | Other assets | 5 | Other liabilities | (7 | ) | ||||||
Derivatives not designated as hedging instruments: | |||||||||||
Foreign currency exchange contracts | Other liabilities | — | Other liabilities | (1,110 | ) | ||||||
Interest rate cap contracts | Other assets | 2,445 | Other assets | 3,922 | |||||||
Derivatives Designated as Hedging Instruments
The Company has operations in foreign countries, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.
Certain of the foreign currency forward contracts are designated as cash flow hedging instruments and qualify for hedge accounting treatment. Gains and losses arising from such contracts are recorded as a component of accumulated other comprehensive income (“OCI”) as gains and losses on derivative instruments, net of income taxes. The hedging gains and losses in OCI are subsequently reclassified into earnings in the same period in which the underlying transactions affect the Company’s earnings. If all or a portion of the forecasted transaction is cancelled, the Company would reclassify the hedge into earnings.
As of September 30, 2018, the total notional amount of the forward contracts that are designated as cash flow hedging instruments was $19.2 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $1.4 million of net derivative loss included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the nine months ended September 30, 2018 and 2017.
The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. As of September 30, 2018, there were two interest rate swap agreements outstanding with a total notional amount of $30.0 million Australian dollars (approximately $21.7 million U.S. dollars). The interest rate swap agreements are designated as cash flow hedges and accounted for using hedge accounting.
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The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (in thousands):
Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI | Location of Gain or (Loss) Reclassified from OCI into Income | Gain or (Loss) Reclassified from OCI into Income | |||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||
Foreign currency exchange contracts | $ | (916 | ) | $ | (27 | ) | Salaries and employee benefits | $ | 95 | $ | 286 | |||||||
Foreign currency exchange contracts | (130 | ) | 70 | General and administrative expenses | 11 | 35 | ||||||||||||
Interest rate swap agreements | 3 | 10 | Interest expense | 4 | — | |||||||||||||
Derivatives Designated as Hedging Instruments | Gain or (Loss) Recognized in OCI | Location of Gain or (Loss) Reclassified from OCI into Income | Gain or (Loss) Reclassified from OCI into Income | |||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||
Foreign currency exchange contracts | $ | (1,990 | ) | $ | 1,708 | Salaries and employee benefits | $ | 1,078 | $ | 758 | ||||||||
Foreign currency exchange contracts | (206 | ) | 310 | General and administrative expenses | 46 | 76 | ||||||||||||
Interest rate swap agreements | (9 | ) | 29 | Interest expense | 29 | 110 | ||||||||||||
In October 2018, the Company entered into four separate interest rate swap agreements in an aggregated notional amount of $349.5 million to hedge the exposure to fluctuations in interest rates on its variable interest rate debt. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. In accordance with authoritative guidance relating to derivatives and hedging transactions, the Company designates its interest rate swap instruments as cash flow hedges.
In October 2018, the Company, through its wholly owned subsidiary Cabot, entered into an interest rate cap contract (the “2018 Cap”) with a notional amount of £300.0 million (approximately $390.6 million) that is used to manage its risk related to interest rate fluctuations on Cabot’s variable interest rate bearing debt. The 2018 Cap matures in September 2021 and is structured as a series of European call options (“Caplets”) such that if exercised, Cabot will receive a payment equal to 3-months GBP-LIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, Cabot will elect to exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash flows of the interest payments to the extent GBP-LIBOR exceeds the strike price of the Caplets. The Company expects the hedge relationship to be highly effective and designates the 2018 Cap as a cash flow hedge instrument.
Derivatives Not Designated as Hedging Instruments
On May 8, 2018, in anticipation of the completion of the Cabot Transaction, Encore entered into a foreign exchange forward contract with a notional amount of £176.0 million, which was approximately the amount of cash consideration for the Cabot Transaction. The forward contract settled on August 3, 2018 at a total loss of $9.3 million. This loss was substantially offset by a decrease in the final purchase price in U.S. dollars for the Cabot Transaction.
The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value.
As of September 30, 2018, the Company, through its wholly owned subsidiary Cabot, also held two interest rate cap contracts with an aggregate notional amount of £300.0 million (approximately $390.7 million) that were used to manage its risk related to interest rate fluctuations. The Company did not apply hedge accounting on these interest rate cap contracts. In October 2018, Cabot terminated these interest rate cap contracts and entered into a new 2018 Cap as discussed above.
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The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (in thousands):
Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||
Foreign currency exchange contracts | Other (expense) income | $ | (2,281 | ) | $ | (833 | ) | $ | (9,221 | ) | $ | 1,790 | ||||||
Interest rate cap contracts | Interest income (expense) | 289 | 919 | (1,427 | ) | 919 | ||||||||||||
Interest rate swap agreements | Interest expense | — | — | — | 110 | |||||||||||||
Note 6: Investment in Receivable Portfolios, Net
In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. With gross collections being discounted at monthly IRRs, when collections are lower in the near term, even if substantially higher collections are expected later in the collection curve, an allowance charge could result.
The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the carrying value of a Cost Recovery Portfolio has been fully recovered.
Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.
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The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):
Accretable Yield | Estimate of Zero Basis Cash Flows | Total | |||||||||
Balance at December 31, 2017 | $ | 3,695,069 | $ | 369,632 | $ | 4,064,701 | |||||
Revenue from receivable portfolios | (249,821 | ) | (31,188 | ) | (281,009 | ) | |||||
Allowance reversals on receivable portfolios, net | (8,082 | ) | (1,729 | ) | (9,811 | ) | |||||
Reductions on existing portfolios, net | (24,945 | ) | (39,529 | ) | (64,474 | ) | |||||
Additions for current purchases | 285,172 | — | 285,172 | ||||||||
Effect of foreign currency translation | 57,577 | 643 | 58,220 | ||||||||
Balance at March 31, 2018 | 3,754,970 | 297,829 | 4,052,799 | ||||||||
Revenue from receivable portfolios | (258,698 | ) | (33,964 | ) | (292,662 | ) | |||||
Allowance reversals on receivable portfolios, net | (15,411 | ) | (2,221 | ) | (17,632 | ) | |||||
Additions on existing portfolios, net | 136,267 | 5,824 | 142,091 | ||||||||
Additions for current purchases | 345,006 | — | 345,006 | ||||||||
Effect of foreign currency translation | (97,448 | ) | (597 | ) | (98,045 | ) | |||||
Balance at June 30, 2018 | 3,864,686 | 266,871 | 4,131,557 | ||||||||
Revenue from receivable portfolios | (263,109 | ) | (32,248 | ) | (295,357 | ) | |||||
Allowance reversals on receivable portfolios, net | (1,196 | ) | (2,833 | ) | (4,029 | ) | |||||
Additions on existing portfolios, net | 23,241 | 14,481 | 37,722 | ||||||||
Additions for current purchases | 262,751 | — | 262,751 | ||||||||
Effect of foreign currency translation | (20,483 | ) | (136 | ) | (20,619 | ) | |||||
Balance at September 30, 2018 | $ | 3,865,890 | $ | 246,135 | $ | 4,112,025 | |||||
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Accretable Yield | Estimate of Zero Basis Cash Flows | Total | |||||||||
Balance at December 31, 2016 | $ | 3,092,004 | $ | 365,504 | $ | 3,457,508 | |||||
Revenue from receivable portfolios | (211,105 | ) | (38,733 | ) | (249,838 | ) | |||||
Allowance reversals on receivable portfolios, net | (613 | ) | (1,519 | ) | (2,132 | ) | |||||
(Reductions) additions on existing portfolios, net | (90,138 | ) | 57,446 | (32,692 | ) | ||||||
Additions for current purchases | 200,728 | — | 200,728 | ||||||||
Effect of foreign currency translation | 38,712 | 467 | 39,179 | ||||||||
Balance at March 31, 2017 | 3,029,588 | 383,165 | 3,412,753 | ||||||||
Revenue from receivable portfolios | (224,310 | ) | (39,097 | ) | (263,407 | ) | |||||
Allowance reversals on receivable portfolios, net | (7,121 | ) | (1,708 | ) | (8,829 | ) | |||||
Additions on existing portfolios, net | 225,021 | 9,888 | 234,909 | ||||||||
Additions for current purchases | 258,687 | — | 258,687 | ||||||||
Effect of foreign currency translation | 66,927 | (753 | ) | 66,174 | |||||||
Balance at June 30, 2017 | 3,348,792 | 351,495 | 3,700,287 | ||||||||
Revenue from receivable portfolios | (230,403 | ) | (33,621 | ) | (264,024 | ) | |||||
Allowance reversals on receivable portfolios, net | (17,817 | ) | (1,747 | ) | (19,564 | ) | |||||
Additions on existing portfolios, net | 27,162 | 1,539 | 28,701 | ||||||||
Additions for current purchases | 336,725 | — | 336,725 | ||||||||
Effect of foreign currency translation | 56,971 | 375 | 57,346 | ||||||||
Balance at September 30, 2017 | $ | 3,521,430 | $ | 318,041 | $ | 3,839,471 | |||||
During the three months ended September 30, 2018, the Company purchased receivable portfolios with a face value of $1.6 billion for $248.7 million, or a purchase cost of 15.9% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended September 30, 2018 amounted to $512.3 million. During the three months ended September 30, 2017, the Company purchased receivable portfolios with a face value of $3.0 billion for $292.3 million, or a purchase cost of 9.7% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended September 30, 2017 amounted to $630.6 million.
During the nine months ended September 30, 2018, the Company purchased receivable portfolios with a face value of $6.2 billion for $885.0 million, or a purchase cost of 14.2% of face value. The estimated future collections at acquisition for all portfolios purchased during the nine months ended September 30, 2018 amounted to $1,772.9 million. During the nine months ended September 30, 2017, the Company purchased receivable portfolios with a face value of $7.1 billion for $757.5 million, or a purchase cost of 10.6% of face value. The estimated future collections at acquisition for all portfolios purchased during the nine months ended September 30, 2017 amounted to $1,555.0 million.
All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended September 30, 2018 and 2017, Zero Basis Revenue was approximately $32.2 million and $33.6 million, respectively. During the three months ended September 30, 2018 and 2017, allowance reversals on Zero Basis Portfolios were $2.8 million and $1.7 million, respectively.
During the nine months ended September 30, 2018 and 2017, Zero Basis Revenue was approximately $97.4 million and $111.5 million, respectively. During the nine months ended September 30, 2018 and 2017, allowance reversals on Zero Basis Portfolios were $6.8 million and $5.0 million, respectively.
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The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages):
Three Months Ended September 30, 2018 | |||||||||||||||
Accrual Basis Portfolios | Cost Recovery Portfolios | Zero Basis Portfolios | Total | ||||||||||||
Balance, beginning of period | $ | 3,074,292 | $ | 10,329 | $ | — | $ | 3,084,621 | |||||||
Purchases of receivable portfolios | 248,691 | — | — | 248,691 | |||||||||||
Disposals or transfers to assets held for sale | (4,253 | ) | (1,111 | ) | — | (5,364 | ) | ||||||||
Gross collections(1) | (463,474 | ) | (306 | ) | (35,063 | ) | (498,843 | ) | |||||||
Put-Backs and Recalls(2) | (2,056 | ) | — | (18 | ) | (2,074 | ) | ||||||||
Foreign currency adjustments | (17,208 | ) | (93 | ) | — | (17,301 | ) | ||||||||
Revenue recognized | 263,109 | — | 32,248 | 295,357 | |||||||||||
Portfolio allowance reversals, net | 1,196 | — | 2,833 | 4,029 | |||||||||||
Balance, end of period | $ | 3,100,297 | $ | 8,819 | $ | — | $ | 3,109,116 | |||||||
Revenue as a percentage of collections(3) | 56.8 | % | — | % | 92.0 | % | 59.2 | % | |||||||
Three Months Ended September 30, 2017 | |||||||||||||||
Accrual Basis Portfolios | Cost Recovery Portfolios | Zero Basis Portfolios | Total | ||||||||||||
Balance, beginning of period | $ | 2,541,590 | $ | 14,335 | $ | — | $ | 2,555,925 | |||||||
Purchases of receivable portfolios | 292,332 | — | — | 292,332 | |||||||||||
Disposals or transfers to assets held for sale | (3,536 | ) | (265 | ) | — | (3,801 | ) | ||||||||
Gross collections(1) | (407,435 | ) | (435 | ) | (35,126 | ) | (442,996 | ) | |||||||
Put-Backs and Recalls(2) | (407 | ) | — | (242 | ) | (649 | ) | ||||||||
Foreign currency adjustments | 44,366 | 46 | — | 44,412 | |||||||||||
Revenue recognized | 230,403 | — | 33,621 | 264,024 | |||||||||||
Portfolio allowance reversals, net | 17,817 | — | 1,747 | 19,564 | |||||||||||
Balance, end of period | $ | 2,715,130 | $ | 13,681 | $ | — | $ | 2,728,811 | |||||||
Revenue as a percentage of collections(3) | 56.5 | % | — | % | 95.7 | % | 59.6 | % | |||||||
________________________
(1) | Does not include amounts collected on behalf of others. |
(2) | Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”). |
(3) | Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals. |
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Nine Months Ended September 30, 2018 | |||||||||||||||
Accrual Basis Portfolios | Cost Recovery Portfolios | Zero Basis Portfolios | Total | ||||||||||||
Balance, beginning of period | $ | 2,879,170 | $ | 11,443 | $ | — | $ | 2,890,613 | |||||||
Purchases of receivable portfolios | 885,033 | — | — | 885,033 | |||||||||||
Disposals or transfers to assets held for sale | (9,358 | ) | (1,373 | ) | — | (10,731 | ) | ||||||||
Gross collections(1) | (1,379,095 | ) | (1,729 | ) | (103,214 | ) | (1,484,038 | ) | |||||||
Put-Backs and Recalls(2) | (14,231 | ) | — | (171 | ) | (14,402 | ) | ||||||||
Foreign currency adjustments | (57,539 | ) | (320 | ) | — | (57,859 | ) | ||||||||
Revenue recognized | 771,628 | — | 97,400 | 869,028 | |||||||||||
Reclassification adjustments(3) | — | 798 | (798 | ) | — | ||||||||||
Portfolio allowance reversals, net | 24,689 | — | 6,783 | 31,472 | |||||||||||
Balance, end of period | $ | 3,100,297 | $ | 8,819 | $ | — | $ | 3,109,116 | |||||||
Revenue as a percentage of collections(4) | 56.0 | % | — | % | 94.4 | % | 58.6 | % | |||||||
Nine Months Ended September 30, 2017 | |||||||||||||||
Accrual Basis Portfolios | Cost Recovery Portfolios | Zero Basis Portfolios | Total | ||||||||||||
Balance, beginning of period | $ | 2,368,366 | $ | 14,443 | $ | — | $ | 2,382,809 | |||||||
Purchases of receivable portfolios | 756,305 | 1,169 | — | 757,474 | |||||||||||
Disposals or transfers to assets held for sale | (11,004 | ) | (265 | ) | — | (11,269 | ) | ||||||||
Gross collections(1) | (1,212,357 | ) | (1,534 | ) | (116,150 | ) | (1,330,041 | ) | |||||||
Put-Backs and Recalls(2) | (5,401 | ) | — | (275 | ) | (5,676 | ) | ||||||||
Foreign currency adjustments | 127,852 | (132 | ) | — | 127,720 | ||||||||||
Revenue recognized | 665,818 | — | 111,451 | 777,269 | |||||||||||
Portfolio allowance reversals, net | 25,551 | — | 4,974 | 30,525 | |||||||||||
Balance, end of period | $ | 2,715,130 | $ | 13,681 | $ | — | $ | 2,728,811 | |||||||
Revenue as a percentage of collections(4) | 54.9 | % | — | % | 96.0 | % | 58.4 | % | |||||||
________________________
(1) | Does not include amounts collected on behalf of others. |
(2) | Put-Backs represent accounts that are returned to the seller in accordance with the respective purchase agreement. Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement. |
(3) | Reclassification relating to certain Zero Basis Revenue that was classified as collections in cost recovery portfolios in prior periods. |
(4) | Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals. |
The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands):
Valuation Allowance | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Balance at beginning of period | $ | 75,129 | $ | 130,675 | $ | 102,576 | $ | 137,037 | |||||||
Provision for portfolio allowances | 6,156 | 10,181 | 8,816 | 10,863 | |||||||||||
Reversal of prior allowances | (10,185 | ) | (29,745 | ) | (40,288 | ) | (41,388 | ) | |||||||
Effect of foreign currency translation | (365 | ) | 1,759 | (369 | ) | 6,358 | |||||||||
Balance at end of period | $ | 70,735 | $ | 112,870 | $ | 70,735 | $ | 112,870 | |||||||
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Note 7: Deferred Court Costs, Net
The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections the Company is required to pay certain upfront costs to the applicable courts that are recoverable from the consumer (“Deferred Court Costs”).
The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve for those costs that it believes will ultimately be uncollectible. The Company determines the reserve based on an estimated court cost recovery rate established based on its analysis of historical court costs recovery data. The Company estimates deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and writes off any Deferred Court Costs not recovered within the respective deferral period. Collections received from debtors are first applied against related court costs with the balance applied to the debtors’ account balance.
Deferred Court Costs for the deferral period consist of the following as of the dates presented (in thousands):
September 30, 2018 | December 31, 2017 | ||||||
Court costs advanced | $ | 812,359 | $ | 743,584 | |||
Court costs recovered | (328,715 | ) | (299,606 | ) | |||
Court costs reserve | (389,627 | ) | (364,015 | ) | |||
Deferred court costs | $ | 94,017 | $ | 79,963 | |||
A roll forward of the Company’s court cost reserve is as follows (in thousands):
Court Cost Reserve | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Balance at beginning of period | $ | (381,125 | ) | $ | (345,971 | ) | $ | (364,015 | ) | $ | (327,926 | ) | |||
Provision for court costs | (23,065 | ) | (19,767 | ) | (67,293 | ) | (60,031 | ) | |||||||
Net down of reserve after deferral period | 13,603 | 12,419 | 38,990 | 36,992 | |||||||||||
Effect of foreign currency translation | 960 | (1,491 | ) | 2,691 | (3,845 | ) | |||||||||
Balance at end of period | $ | (389,627 | ) | $ | (354,810 | ) | $ | (389,627 | ) | $ | (354,810 | ) | |||
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Note 8: Other Assets
Other assets consist of the following (in thousands):
September 30, 2018 | December 31, 2017 | ||||||
Identifiable intangible assets, net | $ | 64,067 | $ | 75,736 | |||
Other financial receivables | 41,003 | 37,861 | |||||
Service fee receivables | 31,782 | 25,609 | |||||
Assets held for sale | 26,241 | 18,741 | |||||
Prepaid expenses | 24,341 | 27,606 | |||||
Deferred tax assets | 14,376 | 18,773 | |||||
Security deposits | 2,947 | 3,451 | |||||
Derivative instruments | 2,450 | 5,834 | |||||
Funds held in escrow | — | 28,199 | |||||
Prepaid income taxes | — | 27,917 | |||||
Other | 37,395 | 33,001 | |||||
Total | $ | 244,602 | $ | 302,728 | |||
Note 9: Debt, Net
The Company is in compliance with all covenants under its financing arrangements as of September 30, 2018. The components of the Company’s consolidated debt and capital lease obligations were as follows (in thousands):
September 30, 2018 | December 31, 2017 | ||||||
Encore revolving credit facility | $ | 447,000 | $ | 328,961 | |||
Encore term loan facility | 197,927 | 181,687 | |||||
Encore senior secured notes | 325,000 | 326,029 | |||||
Encore convertible notes and exchangeable notes | 656,000 | 483,500 | |||||
Less: debt discount | (39,445 | ) | (32,720 | ) | |||
Cabot senior secured notes | 1,220,524 | 1,216,485 | |||||
Less: debt discount | (1,734 | ) | (1,927 | ) | |||
Cabot senior revolving credit facility | 283,678 | 179,008 | |||||
Cabot securitisation senior facility | 390,690 | 391,790 | |||||
Preferred equity certificates | — | 253,324 | |||||
Other credit facilities | 57,980 | 68,001 | |||||
Other | 63,633 | 92,792 | |||||
Capital lease obligations | 8,005 | 6,069 | |||||
3,609,258 | 3,492,999 | ||||||
Less: debt issuance costs, net of amortization | (47,791 | ) | (46,123 | ) | |||
Total | $ | 3,561,467 | $ | 3,446,876 | |||
Encore Revolving Credit Facility and Term Loan Facility
The Company has a revolving credit facility and term loan facility pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility of $894.4 million (the “Revolving Credit Facility”) and a term loan facility of $203.7 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”).
23
During the quarter, the Company (1) extended the maturity of approximately $107.4 million of Revolving Credit Facility commitments from February 2019 to December 2021 and (2) exercised the remaining $99.7 million remaining on the accordion feature. Provisions of the Restated Credit Agreement as of September 30, 2018 include, but are not limited to:
• | Revolving Credit Facility commitments of (1) $884.2 million that expire in December 2021 and (2) $10.2 million that expire in February 2019, in each case with interest at a floating rate equal to, at the Company’s option, either: (a) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the cash flow leverage ratio of Encore and its restricted subsidiaries as defined in the Restated Credit Agreement; or (b) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (i) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (ii) the federal funds effective rate from time to time, plus 0.5% per annum, (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum and (iv) zero; |
• | A $194.6 million term loan maturing in December 2021, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. Principal amortizes $2.5 million in 2018 and $15.3 million in each of 2019 and 2020 with the remaining principal due in 2021; |
• | A $9.1 million term loan maturing in February 2019, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 |