A recapitalisation plan has failed to save debt collector Collection House (ASX: CLH) after it languished for two years in COVID-induced doldrums and a weak national economic situation, with the company today announcing it has appointed administrators.
The Brisbane-based company today requested its securities be suspended from trading on the ASX and has appointed FTI Consulting as voluntary administrators who now have the ironic task of protecting Collection House from creditors chasing up debts of their own.
CLH said the decision came after “exhaustive attempts to restructure the business and raise additional funding were unsuccessful”. This included multiple divestments of assets including its debt ledger book to Credit Corp Group (ASX: CCP).
However it was the company’s debt facility with now-collapsed Volt Bank, secured against CLH’s substantial investment in the neobank, which may have been its undoing after the challenger bank announced yesterday it was returning its banking licence and asking users to withdraw all funds.
Collection House made an $8.5 million investment in Volt in January 2019, one day after the neobank had been given its authorised deposit-taking institution (ADI) licence. By mid-2020 the value of that investment had declined to $4.86 million, dropping further to $3.5 million by mid-2021.
Voluntary administrators John Park, Ben Campbell and Kelly Trenfield will now conduct an independent assessment of the business, engage with key stakeholders regarding funding options, and run an expedited sale and recapitalisation process for the company.
“Our intention is to undertake an urgent process seeking options to restructure and recapitalise the Collection House business,” Park said.
The voluntary administration comes after the company struggled to regain momentum following the COVID-19 pandemic and the impact it had on the national economy.
Lingering effects of the health crisis meant general levels of activity in the debt collection sector remained depressed according to CLH’s latest half year report, which described the company’s performance as “disappointing, with little improvement from the previous six-month period”.
“General levels of activity in the receivables management sector over the last six months remain depressed, as clients continued to implement conservative customer engagement strategies in response to the longer than anticipated COVID-19 impacts, with revenue remaining significantly lower than pre-COVID levels,” CLH said in February this year.
That half year report was a harbinger of things to come for CLH, which saw its loss worsen significantly by 570.3 per cent to $63.7 million, compared to a $9.5 million loss in the prior corresponding half year period.
Revenue was also weaker in the six months to 31 December 2021, down 42.7 per cent from $46.2 million to just $26.4 million.
Two attempts to recapitalise and resuscitate the business appear to have been somewhat futile too. Over the past two years, more than $170 million of sales to Credit Corp Group have been completed, the latter of which brought CLH’s cash reserves to $9 million.
The first recapitalisation attempt was completed in December 2020 when it sold most of its $200-220 million purchased debt ledger (PDL) book to Credit Corp Group for $160 million, plus a potential addition of $15 million depending on asset performance over the following eight years.
One month later, CLH CEO Doug McAlpine told shareholders at the 2020 annual general meeting that the sale would “at least for now” impact earnings and cashflow, and noted the “next few accounting periods are likely to remain challenging”.
That was certainly the case. Following the AGM, the company’s revenue continued to soften, down 46.6 per cent to $46.2 million in 1H21, though losses improved at that time by 79.8 per cent to $9.55 million.
In April 2021, the company said flooding events in New South Wales, combined with the ongoing impacts of COVID-19 meant trading was “subdued”. Despite the circumstances, cash flow was positive in the March 2021 quarter.
Two months later, the company appointed a new CFO - Peter Gunn - replacing Lynda Morris who joined in January 2020, just two months before the virus outbreak hit Australia in earnest.
The company appeared to be on the mend by the end of the 2021 financial year however, with losses improving significantly from a mid-pandemic loss after tax of $145.1 million to just $32 million.
In the months since however, the company’s fortunes certainly took a turn, with CLH’s latest first half results demonstrating a loss of $63.7 million - basically double the loss that it incurred in the entire prior financial year.
This led CLH to throw one last Hail Mary - that being its second recapitalisation transaction.
Under this deal, CLH hoped to become “substantially debt-free”, providing it with “a pathway to return the business to profitability, in line with the business turnaround initiatives”.
The transaction involved the sale of its New Zealand purchased debt ledgers to Credit Corp for $12 million, and CLH agreed to let Credit Corp buy its outstanding senior debt (approximately $52 million) from existing lenders.
“Although the recapitalisation results in an immediate improvement to CLH’s balance sheet, the company continues to focus on revenue and productivity improvements in order to return the business to sustainable profit as a matter of priority,” CLH said.
“Our expectation of underlying recovery in the debt collection sector will assist in this recovery. However, the company is also implementing a range of strategies to reduce its overhead cost structure across premises, technology and corporate costs.
“The board and management are confident that the repositioning of the company to a capital light, customer focused operating model provides a platform to better service our customers, clients and communities.”
Recently, the company announced the completion of the sale to Credit Corp Group, noting it was released from all obligations associated with $52.2 million of senior debt.
At the time, the company said it had a remaining $6 million senior debt facility secured on a limited-recourse basis against the company’s investment in Volt Bank, an Australian neobank which collapsed yesterday.
“$1.0 million of this Volt Facility was repaid during March 2022 with the outstanding balance now $5.0 million,” CLH said.
“CLH continues to actively explore opportunities to realise this investment and expects to repay this remaining facility in the near future.”
While today’s announcement did not make mention of the impact of the Volt collapse, the bank’s closure can hardly have helped CLH which was already in a serious predicament of its own.
Business News Australia reached out to Collection House for clarification on the impact of the Volt collapse but did not receive a response at the time of publication.
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