Debt collector Collection House (ASX: CLH) has faced tough love from investors in its first day of trading since Valentine's Day 2020, with a discounted asset sale sparking a sell-off that cut $99 million from the Brisbane-based company's value.
On 14 February last year the group took what became a very long breather from the share market as it sought to recapitalise, following a write-down of its purchased debt ledger (PDL) book that meant it couldn't meet its lender requirements.
Collection House had acquired new debts in an environment of high competition for PDL assets, but the maturity of the debt they financed it with was out of sync with longer term cash flows from the assets themselves.
Before the trading suspension, and shortly after the resignation of then managing director Anthony Rivas, at the end of 2019 the book value of Collection House's PDL asset base was worth $338 million.
However, because of the expected costs of recouping the money it was estimated the net realisable value of the PDL portfolio was actually worth more like $200-220 million.
On this recent Christmas Eve, Collection House announced it was selling off most of the PDL portfolio to Credit Corp Group (ASC: CCP) for $160 million, plus a potential addition of $15 million depending on asset performance over the next eight years.
In turn, Credit Corp is giving Collection House a short-term loan worth $15 million for general corporate purposes, as almost $200 million from the proceeds of the asset sale and a newly secured $45 million debt facility will be used to repay existing senior debt.
When CLH shares started trading again this morning after the transaction was completed, they plunged by 64 per cent to $0.39 each.
In the 24 December announcement, the board and management recognised a significant amount of work was needed to restore shareholder confidence and value.
"However, it is the Company's view that there are significant opportunities in the Australian and New Zealand markets for a collection services company that is well managed, focused on the customer and is appropriately capitalised," the board stated.
"The directors and management acknowledge that shareholders are justifiably frustrated by the extended period of suspension of the company's shares. The company was operating under a range of confidentiality and other constraints while undertaking the comprehensive recapitalisation process and negotiating the transaction.
"Good progress has already been made in preparing for the next stage of the company's journey, and we are confident of demonstrating the efficacy of a new customer focused strategy through growth and restoration of shareholder value over coming financial periods."
Collection House has retained its New Zealand PDL portfolio previously acquired from RML NZ, and the sale assets do not include obligations associated with PDLs that are subject to a portfolio enhancement program with Balbec Capital LP.
"Further consideration of approximately $3 million to $4 million may be obtained from accounts excluded from the PDL portfolio at the time of settlement and is expected to be potentially received in January 2021, subject to obtaining further individual vendor consents," Collection House noted today.
"These funds will be applied in reduction of the company's new senior debt facilities."
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