PRA Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. PRA Group buys, collects and manages nonperforming-loan portfolios, with operations in the Americas, Europe and Australia. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $209.2 | $258.3 | $364.7 | $498.9 |
| Operating income | $45.6 | $83.7 | $11.9 | $155.7 |
| Operating margin | 21.8% | 32.4% | 3.3% | 31.2% |
| Net income (loss) attributable to PRA Group | $(3.8) | $36.5 | $(62.4) | $76.5 |
| Diluted EPS | $(0.10) | $0.91 | $(1.60) | $1.88 |
| Net interest expense | $43.0 | $31.6 | $81.3 | $63.3 |
For the six months, cash collections were $830.6 million, down 10.2%; portfolio acquisitions were $558.0 million, up from $378.8 million. Estimated remaining collections (ERC) were $5.9 billion at quarter-end. Cash efficiency was 61.2% in Q2 and 57.8% for the first half.
At June 30, 2023, cash and cash equivalents were $111.4 million, finance receivables net were $3.425 billion, total assets were $4.321 billion, and total equity was $1.240 billion. Cash used in operating activities was $80.8 million for the first half; investing activities used $94.0 million and financing activities provided $208.5 million. Cash, cash equivalents and restricted cash totaled $124.7 million, including $13.3 million of restricted cash.
Borrowings were $2.740 billion net of debt discounts and issuance costs ($2.753 billion principal), versus $2.495 billion net at year-end 2022. Debt to Adjusted EBITDA was 2.76x, compared with 2.25x at year-end. Revolving-facility availability was $1.449 billion before borrowing-base and covenant restrictions, and $332.5 million after those restrictions. Interest-bearing deposits were $99.3 million.
Material changes versus comparable periods
- Q2 revenue fell 19.0% year over year; first-half revenue fell 26.9%. The first-half comparison was affected by lower portfolio purchases and cash overperformance, and by favorable expected-recovery changes recorded in 2022 that did not recur.
- First-half changes in expected recoveries were a net negative $15.8 million, versus a positive $86.5 million a year earlier. This included $29.2 million of collections above forecast, offset by a $45.0 million reduction in expected future recoveries. Management cited weaker U.S. call-center collection performance and economic conditions. Q2 changes in expected recoveries were positive $21.1 million.
- Operating expenses rose 2.8% in the first half to $352.8 million, while operating income fell sharply. Legal collection costs increased 32.7%; compensation costs included $7.5 million of higher severance expense.
- First-half net interest expense increased 28.4%, primarily due to higher average debt and interest rates. The company issued $400 million of 8.375% senior notes due 2028 and used substantially all net proceeds to retire $345 million of 3.50% convertible notes that matured June 1, 2023; remaining proceeds repaid revolving debt.
Outlook, risks and contingencies
- No specific earnings or collection guidance was provided. Management said existing cash, operating cash generation, collections, revolving-credit availability and capital-market access are expected to fund operations and commitments for the next 12 months and beyond.
- Management noted elevated inflation, rising interest rates, currency fluctuations and global-recession concerns, with possible near-term pressure on collections. Weaker U.S. collections led to downward revisions in expected future recoveries; Europe collections exceeded expectations by 7.0% in the first half, but with less outperformance than in prior quarters.
- Key risks include collection estimates and portfolio pricing, availability and cost of debt, covenant compliance, interest and foreign-exchange changes, regulatory and legal actions, and economic deterioration. A 50-basis-point rate increase was estimated to raise interest expense over the following 12 months by $5.4 million; 62% of variable-rate borrowings were hedged on a notional basis.
- The company reported compliance with financing covenants at June 30, 2023. It had forward-flow commitments with a maximum remaining purchase price of $557.7 million, including $535.0 million due within 12 months. Management can slow portfolio purchases if needed.
- Routine legal and regulatory matters are ongoing. The company said the estimated aggregate reasonably possible losses above accrued amounts, where estimable, were not material; actual losses could exceed estimates. No new material legal proceedings or material developments in previously disclosed proceedings were reported.
Important facts for investors to verify
- Whether U.S. collections and the revised future-recovery assumptions stabilize, particularly for the 2021 U.S. Core vintage.
- Whether collections and portfolio purchases support the $5.9 billion ERC estimate, and how purchasing volume and pricing affect future returns.
- Available liquidity after borrowing-base restrictions and covenants, as well as the effect of elevated borrowing costs and the 8.375% notes.
- Progress against debt-reduction objectives and the reported increase in Debt to Adjusted EBITDA to 2.76x.
- Future legal or regulatory developments, given the judgment involved in estimating contingent losses.