Clouds had been gathering over Collection House, which uses an online cartoon character called Kash for internet customers to pay back debts, since November last year when then chief executive Anthony Rivas suddenly resigned.
Then in February, Collection House shares were suspended amid warnings that the values of ledgers of debt, which are acquired from institutions such as banks, could be cut.
Accounts finally released on Tuesday – after lengthy delays – show statutory earnings for the six months to December had tumbled from a $8.5 million profit to a $47.3 million loss.
The big hit was an $89.9 million hit to the value of debt ledgers. Collection House blamed a new softer approach to collecting debts for the change including less bankruptcy action.
The remaining value of ledgers is $337 million. Some industry sources had been suspicious that the values of ledgers should have been far more aggressively written down earlier, but Mr McAlpine said the sole factor behind this recent hit was a review initiated last year.
The review took aim at Collection House’s controversial litigation practices; consumer groups last year uncovered that the company was a far bigger user of bankruptcy actions than other players.
Already last year the company had lifted the threshold for initiating bankruptcy action to $20,000.
Mr McAlpine said new steps included action not being taken against a customer unless they had been on Collection House’s books for at least one year. Board approval is also required.
But Collection House, during the middle of the firestorm last year and before Mr McAlpine was chief executive, had maintained that the bankruptcy steps taken then were a “last resort”. It used the same term to describe the latest measures on Tuesday.
“All I can do is speak to the company today as I am running it,” Mr McAlpine said. The new measures went a long way to showing it is now done as a final option, he argued.
Since November last year, he said no bankruptcy action had been initiated. “The proof’s in the pudding,” he said.
The measures mean that less will be collected from debt ledgers, triggering the $89.9 million write-down. That in turn breached covenants, which then resulted in all the bank loans being classed as current liabilities and spurred the warning about continuing as a going concern.
Collection House’s lenders, Westpac and Commonwealth Bank, have reached a standstill agreement until September 30 in which they will not take action. A key requirement is completion of a recapitalisation by that date with Flagstaff Partners acting for Collection House in that process.
Sources said distressed debt funds Cerberus Capital Management, Lone Star Funds and Apollo Global Management were among parties which would look to provide a loan that could also convert parts into equity. Carlyle Special Situations, which is in talks to buy debt collection industry rival Pioneer, ran the numbers early on in the process but has since passed, sources said.
Mr McAlpine declined to name any entities but said “all options [of recapitalisation] are being considered”.
Some loans to embattled companies have ultimately failed: fund manager Blue Sky said it was blindsided after being put into receivership last year after obtaining bailout finance from Oaktree Capital Management.
Mr McAlpine argued the process was organised with interested parties, competitive tension. This would “ensure we are not backed into a corner where we’ve got to accept a solution that isn’t in people’s best interests”, he said.
The recapitalisation was not complex and involved $200 million of senior debt, he said.
The share suspension is likely to continue until at least September, Collection House said.
The latest accounts said that profits, excluding the impairment of debt ledgers, was $15.6 million. That included a $4.1 million gain from offloading part of its portfolio.
Earnings in the division that collects cash on behalf of contracted clients, such as utilities, fell from $5 million to $4.6 million despite revenues rising. Mr McAlpine linked this to some contracts finishing up and the company dropping some work that was not profitable enough.
He said reforms would boost profitability in that division.
The accounts also flagged that COVID-19 had impacted collections on debt ledgers. Mr McAlpine said the final two weeks of March saw collections drop up to 30 per cent from the same period a year earlier.
Since then, it was down about 10 per cent to 15 per cent, he said.
