Business context and reporting period
PRA Group, Inc. purchases and collects portfolios of nonperforming loans, with operations in the Americas, Europe and Australia. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $244.8 million | $263.7 million | $743.7 million | $838.8 million |
| Operating income | $70.8 million | $77.6 million | $226.5 million | $292.5 million |
| Operating margin | 28.9% | 29.4% | 30.4% | 34.9% |
| Net income attributable to PRA Group | $24.7 million | $34.5 million | $101.2 million | $148.9 million |
| Diluted EPS | $0.63 | $0.76 | $2.52 | $3.24 |
- Collections and portfolio revenue: Q3 cash collections were $412.3 million, down 15.6%; nine-month collections were $1.337 billion, down 15.8%. Total portfolio revenue fell 8.8% in Q3 and 12.1% year to date.
- Costs and interest: Operating expenses declined 6.5% in Q3 and 5.3% year to date, but revenue fell faster over the nine-month period. Net interest expense rose 9.6% in Q3 and 4.1% year to date, with management citing higher interest rates.
- Cash flow: Nine-month operating cash flow was negative $3.4 million, versus positive $38.3 million in 2021. Investing activities provided $195.4 million and financing activities used $190.1 million. Cash and cash equivalents were $58.0 million at September 30, down from $87.6 million at year-end 2021.
- Balance sheet and debt: Total assets were $3.895 billion; finance receivables were $3.037 billion. Borrowings, net of debt discounts and issuance costs, were $2.380 billion, down from $2.609 billion at year-end. Total equity was $1.183 billion. Management’s non-GAAP debt-to-adjusted-EBITDA ratio was 2.04x, versus 1.89x at December 31, 2021.
- Available funding: Revolving facilities had $1.722 billion available before borrowing-base restrictions, but only $454.6 million available after those restrictions and covenants. The company reported compliance with financing covenants. Interest-bearing deposits were $88.2 million.
- Portfolio position: Estimated remaining collections (ERC) were $5.320 billion. Nine-month portfolio acquisitions were $561.9 million, compared with $770.6 million in 2021.
Material changes versus the prior comparable period
- Lower collections, particularly in U.S. call-center collections, and lower portfolio purchases weighed on revenue. Management also cited foreign-exchange effects and reduced collection overperformance versus 2021.
- Management attributed lower U.S. portfolio supply to reduced lender charge-offs amid excess consumer liquidity. The strengthening U.S. dollar reduced reported European collections.
- Currency translation adjustments produced a $194.7 million loss in other comprehensive income for the first nine months, contributing to accumulated other comprehensive loss of $426.1 million.
- Shares outstanding declined from 41.0 million at year-end 2021 to 39.0 million at September 30, 2022. The company repurchased $99.4 million of stock in the first nine months; $67.7 million remained under its current authorization.
- The company established a UK revolving credit facility in April 2022 and amended its European facility, including reducing commitments and extending maturity to February 2024.
Outlook, risks, contingencies and unusual items
- No quantified earnings, revenue or collections guidance is provided. Management expects near-term portfolio supply and pricing pressures to continue, but believes charge-offs may rise and improve supply in coming months. It states that cash, collections, available credit and potential capital-market access should fund operations and commitments over the next 12 months and beyond.
- Forward-flow agreements had maximum remaining purchase commitments of $1.035 billion, of which $927.9 million was due within 12 months. Estimated debt interest, fees and principal payments over the next 12 months were approximately $474.7 million, including $355.3 million of principal, primarily related to convertible notes due in 2023.
- Management reported a $20.5 million first-quarter 2022 write-down on one Brazilian portfolio. Nine-month changes in expected recoveries were a net positive $134.8 million, including $87.7 million of collections above forecast and a $47.2 million positive adjustment to future recovery estimates. Management cautions that much of recent overperformance may reflect accelerated timing rather than higher total collections.
- Risks include macroeconomic deterioration and inflation, portfolio availability and pricing, collection estimates, foreign-exchange and interest-rate movements, debt covenant and liquidity requirements, regulation, litigation, cybersecurity, and international operations. The filing says risk factors were not materially changed from the 2021 Form 10-K.
- Routine legal and regulatory matters are ongoing. The company said reasonably possible losses above accrued amounts were not material where estimable, while noting actual losses could exceed current estimates. No goodwill impairment trigger was identified at September 30, 2022.
- Variable-rate borrowings were approximately $1.4 billion. A 50-basis-point rate increase was estimated to increase interest expense by $3.9 million over the following 12 months, after considering hedges and rate floors.
Important facts for investors to verify
- Whether collection trends and portfolio acquisition volumes recover, and how they affect revenue, margins and ERC assumptions.
- The cash-flow outlook and funding available after borrowing-base limits, particularly alongside forward-flow purchases and the 2023 convertible-note maturity.
- Interest expense sensitivity, refinancing terms and continued compliance with financing covenants.
- The sustainability and timing of recovery-estimate revisions, including the effect of foreign exchange and the Brazil portfolio write-down.
- Potential developments in legal or regulatory matters and whether loss accruals remain adequate.