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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 ratios for both US peers and CCP below1. The numbers of the US debt
purchasers further confirm our view: the collections/amortization ratio of CCP is simply too smooth.
PRA Group
US$ '000 2009 2010 2011 2012 2013 2014 2015 2016 2017
Collections 368,003 529,342 705,490 908,684 1,142,437 1,378,812 1,539,495 1,491,986 1,512,605
Amortization 124,756 194,510 293,431 371,497 480,913 576,273 645,004 648,388 719,904
Collections/Amortization 2.95 2.72 2.40 2.45 2.38 2.39 2.39 2.30 2.10
YoY change -7.7% -11.7% 1.7% -2.9% 0.7% -0.2% -3.6% -8.7%

Encore Capital Group


US$ '000 2009 2010 2011 2012 2013 2014 2015 2016 2017
Collections 487,458 604,394 761,158 948,055 1,279,506 1,607,497 1,700,725 1,685,604 1,767,644
Amortization 168,416 217,891 301,621 406,864 546,847 632,072 635,052 654,812 714,271
Collections/Amortization 2.89 2.77 2.52 2.33 2.34 2.54 2.68 2.57 2.47
YoY change -4.2% -9.0% -7.7% 0.4% 8.7% 5.3% -3.9% -3.9%

Credit Corp
AU$ '000 2009 2010 2011 2012 2013 2014 2015 2016 2017
Collections 152,950 178,806 205,289 230,442 250,369 288,106 288,186 321,989 355,674
Amortization 70,181 87,609 93,127 108,439 119,451 136,242 135,721 150,887 166,100
Collections/Amortization 2.18 2.04 2.20 2.13 2.10 2.11 2.12 2.13 2.14
YoY change -6.4% 8.0% -3.6% -1.4% 0.9% 0.4% 0.5% 0.3%

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 rates of amortization reported by these peers
(PRA Group and Encore Capital – 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 the last 4 years has not exceeded 0.9%. At the same time, variations of
Collection/Amortization ratios for PRA Group and Encore Capital Group reached 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 the underlying
performance of the PDL business.

Moreover, CCP has not provided a reasonable answer as to why the Collections/Amortization ratio, as well as
the net profit margin, despite being volatile historically, have almost leveled off since FY 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 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 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 to its shareholders?

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 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
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. Below is a standard message, which appears
during a SACC loan application process:

Source: Money3

We have conducted a comprehensive review of the Wallet Wizard website and could not find any similar
message. We understand 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, targeted by the company, would need such information to make an
informed decision.

An application for a payday loan and a rejection in a payday 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 of credit, a borrower 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 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

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 important 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 20162. 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, was sincere, when he
highlighted the need to improve the Bank’s reputation during Annual General Meeting in December 2017.

2
See Appendix 2
APPENDIX 1

Encore Capital Group 2017 10-K3:

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

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