Encore Capital Group
2020 Annual Report
Better Solutions. Better Life.
encorecapital.com
Contents
03
Letter to Shareholders
14
Awards
07
Financial Highlights
08 Who We Are
10
How We Operate
15 Our Leadership and Board of Directors
16
Investor and Shareholder Services Information
17
Appendix
12
Encore’s Mission, Vision and Values
19
Encore Capital Group 2020 Form 10-K
13
Environmental, Social and Governance (ESG)
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2
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Letter to Shareholders
Ashish Masih
President and Chief Executive Officer
Encore Capital Group, Inc.
Our Outstanding Performance in a Challenging Year
Dear Fellow Shareholders,
In the face of the global COVID-19 pandemic and while adjusting to the realities of a changing world, in 2020
we continued to execute on our strategy, delivered strong financial results, and accomplished a number of
key initiatives. Highest on our list of achievements was the establishment of a new global funding structure,
which we believe is transformational and will provide us with a strong foundation for the future. Most
importantly to me, these accomplishments were made while maintaining our focus on helping consumers
and prioritizing the health of our colleagues. I am proud of what we achieved in 2020.
For years Encore has been helping consumers recover from financial difficulty and regain their personal
economic freedom, and this remains at the core of what we do. Financial hardship for consumers became
more prevalent as a result of the global pandemic. Accordingly, throughout the year, we continued to do
precisely what we do every day, by engaging in honest, empathetic and respectful conversations with
consumers to help them resolve their debts.
In 2020, we reaped the benefits of investments we previously made in technology and compliance, which
enabled us — in the face of the pandemic — to quickly provide safe working conditions for our colleagues
and establish full operational functionality while also setting a record for collections.
33
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Letter to Shareholders
Our Three Pillar Strategy
Our business is straightforward. We look to purchase portfolios of non-performing loans (NPLs) at
attractive cash returns, using the lowest-cost funding available to us. For each portfolio we own, we
strive to meet or exceed our collection expectations while ensuring the highest level of compliance and
consumer focus, all while maintaining an efficient cost structure. We achieve the above objectives by
maintaining focus on our three strategic priorities, which we believe are instrumental in building long-term
shareholder value. These priorities enabled us to deliver outstanding financial performance in 2020 and
place us in a strong position to capitalize on future opportunities.
Market Focus
We target markets that have a large and consistent flow of purchasing opportunities, a strong regulatory
framework that creates advantages for firms with sufficient financial and operational capabilities, a high
degree of sophistication and data availability, and stable, long-term returns. Our current footprint, with
an emphasis on the U.S. and U.K., clearly illustrates this focus. These markets are well established and
defined by a regular stream of portfolio sales from large, well-known banks. For this reason, we do not
have to rely on large macroeconomic events that generate surges in NPL supply. Instead, we thrive on
steady portfolio sales over the credit cycle.
Competitive Advantage
Our company is built around certain key competencies that we have developed over more than 25
years in the business. We excel at operating in highly regulated environments where compliance is
embedded in everything we do, and we treat each consumer with fairness and respect on their path to
financial recovery. We take pride in our operating efficiency, supported by our scale, low-cost platform
and investments in technology. Lastly, our data analytics capabilities allow us to accurately price risk and
optimize collections to deliver attractive returns.
New industry rules announced recently by the Consumer Financial Protection Bureau (CFPB), our
principal regulator in the U.S., will become effective in late 2021. As a result of our expertise and
investment in compliance and risk management, we are well prepared to fully implement the rules.
Balance Sheet Strength
We believe that a strong balance sheet is critical to being successful in our sector and to maximizing
shareholder value. In 2020, we continued our ongoing effort to strengthen our balance sheet. While
operating in a very challenging environment, we reduced our leverage ratio1 to 2.4x, which is comfortably
within our targeted range of 2.0–3.0x, and we reduced our debt/equity ratio to 2.7x. We also successfully
executed our plan to combine the balance sheets of our U.S. and European businesses to form a unified
global funding structure. As a result, we believe we have established a best-in-class capital structure
in terms of cost, liquidity, tenor, diversification of capital sources and overall flexibility, allowing us to
capitalize on opportunities available in 2021 and beyond.
1 Leverage ratio is (net debt/(adjusted EBITDA + collections applied to principal balance)), which is the leverage metric commonly used in our industry.
4
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Letter to Shareholders
2020 Review
In addition to the implementation of our new global funding structure, we completed a number of initiatives
in 2020 and made significant progress toward others with longer-term horizons, all while delivering
another year of significant cash generation, strong earnings and a third consecutive year of leverage
reduction.
Financial Highlights
• Grew collections 4% to $2.11 billion.
• Delivered 100% collections performance versus Dec. 31, 2019 ERC forecast, despite the impacts of
COVID-19.
• Generated strong cash flow fueled by record collections and well-controlled operating expenses.
• Grew net income by 26% to $212 million.
• Increased return on invested capital (ROIC)1 to 12.5% on a pre-tax basis.
• Continued reduction of leverage ratio from 2.7x to 2.4x.
Impact of the COVID-19 Pandemic on Supply
In 2020, the economic shock caused by the COVID-19 pandemic followed by government support across our
markets clearly impacted NPL formation in the financial system. Consequently, we saw a decline in portfolio
volumes being sold. At the same time, banks took large provisions against future losses to manage their
exposure to consumer credit. Despite these pressures, we remained disciplined in our capital allocation,
prioritizing returns over volume, and deployed $660 million at an average purchase price multiple of 2.5x, up
from 2.1x in 2019.
Simplifying Our Business
We made substantial progress in further simplifying our business this past year, the culmination of years of
work toward streamlining our structure, eliminating businesses with lower risk-adjusted returns, and making
it easier to understand our strong financial performance. These changes have eliminated a number of
complexities, such as the need for us to report Cabot’s results in IFRS, complicated ownership structures
with significant minority interest reporting, and constraints on Cabot’s leverage that limited our ability to fully
deploy capital in Europe. We will continue to strive for more clarity in 2021 as we emphasize ROIC as a key
performance metric. In addition, we will discontinue providing adjusted net income and Economic EPS. By
fully anchoring our earnings-related messaging to GAAP net income and GAAP EPS, we hope to eliminate
any confusion about the strength of our earnings power.
Commitment to Environmental, Social and Governance
Encore is committed to Environmental, Social and Governance (ESG) transparency. In 2020, we conducted
an enterprise-wide assessment of our ESG efforts and began to develop a strategy that lays the foundation
for identifying and prioritizing environmental, social and governance opportunities within our business.
Encore’s largest businesses, MCM and Cabot, have been focused on consumers for many years, and it is
clear to us that our relationships with consumers must be a focal point of our ESG program, along with our
Mission, Vision and Values (MVV). We expect to further develop our ESG identity in the future by enhancing
the quality of our disclosures.
1 See appendix for calculation of Pre-Tax ROIC
5
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Letter to Shareholders
Our Priorities for 2021
As we look ahead to 2021 and beyond, banks are expecting an increase in consumer delinquencies
followed by NPLs, which we believe will ultimately result in a meaningful increase in portfolio supply.
We have ample operational capacity and liquidity to capitalize on this pending turn in the credit cycle.
Consistent with our long-term view, we will maintain our focus on our three well-established strategic
priorities: concentrating on markets where our returns are strongest, innovating to continually
enhance our competitive advantages and continuing to optimize our balance sheet. We plan to
faithfully apply the following principles with our focus on maximizing shareholder value:
Operating and Financial Performance:
• Deliver strong ROIC through the credit cycle
Balance Sheet:
• Preserve our financial flexibility
• Target leverage between 2.0x and 3.0x
• Maintain a strong “BB” debt rating
Capital Allocation:
• Portfolio purchases at attractive returns
• Strategic M&A
• Share repurchases
I am proud of my colleagues at Encore and all we have accomplished together in 2020, and I am excited
about our business heading into 2021 as we operate at a high level with a strong liquidity position and
a strong, flexible balance sheet, which will allow us to capture the many opportunities ahead of us.
All the best in the new year — sincerely,
Ashish Masih
President and Chief Executive Officer
Encore Capital Group, Inc.
6
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Financial Highlights
GAAP Net Income
Collections
$212m
$1,968m
$2,027m
$2,112m
$168m
$116m
2018
2019
2020
2018
2019
2020
Returns
Leverage Ratios
16.6%
10.1%
18.2%
10.8%
18.9%
12.5%
4.3x
2.8x
3.4x
2.7x
2.7x
2.4x
2018
2019
2020
2018
2019
2020
GAAP ROAE1
Pre-Tax ROIC2
Debt/Equity
Net Debt/(EBITDA + collections applied to principal balance)3
1
GAAP ROAE (Return on Average Equity) defined as GAAP net income /
average stockholders’ equity
See appendix for calculation of Pre-Tax ROIC (Return on Invested Capital)
2
3
See appendix for reconciliation of Net Debt to GAAP Borrowings
7
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Who We Are
Headquartered in San Diego, Calif., Encore Capital Group, Inc. is a publicly traded NASDAQ Global Select
company (ticker: ECPG). We operate globally with approximately 7,700 colleagues and operations in eight
countries (U.S., U.K., Spain, France, Ireland, Portugal, India and Costa Rica) as well as portfolio investments
in select markets.
Our core business is to purchase portfolios of NPLs from credit originators, including banks, credit unions,
consumer finance companies and retailers. We collect on the purchased portfolios by partnering with
consumers to help them resolve their debt obligations. In certain markets, we also service NPLs on a
contingency basis or in a business process outsourcing (BPO) arrangement for our clients.
7,700 global
colleagues
8 countries
where we operate
51,000+ volunteer
hours globally
5,000+ portfolios
purchased since inception
In business for more than 25 years, we have purchased over 120 million accounts representing
approximately 65 million unique consumers in the U.S. and U.K. Our two largest operating units are
Midland Credit Management and Cabot Credit Management.
• Midland Credit Management (MCM) is the largest debt buyer
in the United States.
• Cabot Credit Management is one of the largest credit
management services providers in Europe and the market
leader in the U.K. and Ireland as measured by ERC.
8
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Who We Are
Encore Enables the Functioning of a Healthy Credit Ecosystem
By purchasing NPL portfolios, we return capital to banks, enabling further lending and thus
playing a key role in the consumer credit ecosystem.
Return of capital to consumer credit ecosystem
Encore
Engages with consumers
to resolve their debt
Issuers sell
charged-off
debt
Encore purchases
and collects on
charged-off debt
Consumer-
centric
approach
Issuers of
consumer
debt
Debt is
charged
off
Proprietary
advanced
analytics
Issuers
outsource
servicing of
debt
Encore also provides
third-party fee-based
servicing in the U.K.,
Spain, France and
Ireland
Operational
expertise
Return of capital to consumer credit ecosystem
Our Largest Markets
Based on our estimates, during 20194 approximately $2 billion and $1 billion were returned by debt
buying firms to banks originating unsecured revolving credit in the U.S. and U.K., respectively.
We deployed $1 billion in 2019 (of which 92% was in U.S. and U.K.) and $660 million in 2020 (of
which 95% was in U.S. and U.K.).
United States
Population: 329m
United Kingdom
Population: 67m
$1.1tr1
Total Revolving
Debt Outstanding
3.7%1
Credit Card Net
Charge-Off Rate
$50b2
Approximate Debt
Charged-Off Annually
$297b3
Total Unsecured Consumer
Credit Outstanding
2.4%3
Unsecured Credit
Net Charge-Off Rate
$8b2
Approximate Debt
Charged-Off Annually
$20b
Estimated Approximate
Face Value Sold in 2019
~$2b Investment Value
$6b
Estimated Approximate
Face Value Sold in 2019
~$1b Investment Value
Source: Federal Reserve, Bank of England, U.S. Bureau of the Census, U.K. Office for National Statistics, Encore management estimates.
1 Federal Reserve update for Q4 2019, not seasonally adjusted and excludes loans secured by real estate.
2 Assumes 17.5% Recovery Rate to Estimate Gross Charge-Offs.
3 Bank of England consumer credit data as of December 2019.
4 Market figures based on 2019 as the most recent pre-pandemic year.
9
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT How We Operate
We are guided by a strong foundation of core capabilities that have enabled our success and growth.
Encore has always been a consumer-focused company and in 2020 we had the opportunity to help more
consumers resolve their debts than ever before. Our passion for fair and respectful consumer treatment
has developed and expanded for many years and we take pride in having launched the industry’s only
Consumer Bill of Rights in the U.S. 10 years ago. Cabot also has a long track record of industry leadership
in consumer and customer satisfaction. In the 2020 survey by the U.K.’s Institute of Customer Service,
Cabot’s score of 84 was not only higher than the U.K. All Sector Average of 77 and the Banks & Building
Societies Average of 79, but it was higher than all High Street banks as well.
As one of the world’s largest debt buyers, we have made substantial investments in regulatory
compliance over time, allowing us to adapt efficiently whenever federal, state or local regulations change.
In the U.K., Cabot was the first large debt buyer to be licensed by the country’s principal regulator, the
Financial Conduct Authority (FCA).
We make disciplined investment decisions based on expected cash returns, reflecting our conservative
approach to capital management. We also have a rigorous approach to monitoring each portfolio purchase
against investment expectations, a process that is ingrained in our highly analytic culture.
1 0
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT How We Operate
Our core competency in understanding the payment
behavior of distressed consumers is influenced by
consumers’ perceived willingness and ability to pay
We use channel-specific models to
optimize operations, strategies and
profitability on an account level
Consumer
behavior
research
Market
data and
insights
Portfolio
valuation
Pre-purchase
model
Servicing
channel
optimization
Digital
Call Center
Direct Mail
Legal
Collection
Agency
No Effort
Continuous feedback between operations, servicing strategy and valuation
Our operational processes are deeply rooted in proprietary analytics and data, which allow us to
confidently underwrite and bid on portfolio purchase opportunities as well as continually refine and improve
our liquidation strategies and collection models. Our large teams of data scientists and statisticians leverage
our proprietary dataset of approximately 120 million accounts to build and refine our prediction models.
We have created innovative systems designed to provide our Account Managers with the best available
information during conversations with consumers and we are leveraging automation, artificial intelligence,
and speech analytics to improve our efficiency and enhance compliance.
11
11
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Encore’s Mission, Vision and Values
Our Mission:
Creating pathways to economic freedom
Our Vision:
We help make credit accessible by partnering
with consumers to restore their financial health
Our Values:
We care
We put people first and
engage with honesty,
empathy, and respect
We care:
We find a better way
We deliver our best in
everything we do, find ways
to make a positive difference,
and achieve impactful results
We put people first and
engage with honesty,
empathy, and respect
We care
We put people first and
engage with honesty,
empathy, and respect
We are inclusive
and collaborative
We embrace our differences
and work together to ensure
every individual can thrive
We find a better way
We deliver our best in
everything we do, find ways
to make a positive difference,
and achieve impactful results
We find a better way:
We care
We put people first and
engage with honesty,
empathy, and respect
We are inclusive
and collaborative
We embrace our differences
and work together to ensure
every individual can thrive
We deliver our best in everything
we do, find ways to make a
positive difference, and achieve
impactful results
To find out more, visit: encorecapital.com/mvv/
We find a better way
We deliver our best in
everything we do, find ways
to make a positive difference,
and achieve impactful results
We are inclusive
and collaborative
We embrace our differences
and work together to ensure
every individual can thrive
We are inclusive and
collaborative:
We embrace our differences
and work together to ensure
every individual can thrive
1 2
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Environmental, Social
and Governance (ESG)
Our commitment to social responsibility, sustainability, and diversity and inclusion (D&I) is an extension of our
Mission, Vision and Values. To ensure we’re prioritizing the sustainability and societal impact of our business
now and in the future, in 2020 we conducted an enterprise-wide assessment of our ESG efforts and created
a comprehensive strategy focused on five key pillars:
Consumer
People
Environment
Community
Operating
Responsibly
These pillars will set the foundation for critical programs in years to come and provide the focus necessary
to continue on our path as responsible corporate citizens, stewards of the environment and cultivators of an
inclusive culture.
We Put Consumers First
We Support and Value Our People
Our consumers are at the heart of our business.
We’re committed to promoting a strong culture
of treating consumers with respect, honesty and
empathy, and keeping consumer service and
compliance at the core of our collection strategy.
Encore is the only company in the debt purchasing
industry to issue a Consumer Bill of Rights focused
on the company’s consumer-focused principled
intent.
Additionally, we offer a financial literacy program,
Money Matters, to educate youth and adults on using
credit responsibly.
We Make a Positive Impact on the Environment
We minimize our environmental footprint through
smart resource use and sustainable practices,
including recycling programs, the use of recycled
paper, plastic-free breakrooms/cafeterias, reduction
of water consumption and electricity use, and
powering our business with renewable energy
where possible.
We Operate Responsibly
We hold ourselves to the highest ethical practices
and decision-making as guided by our Standards of
Business Conduct and Anti-Corruption policy.
We foster a culture of respect and inclusion in
various ways including unconscious bias and
diversity training, D&I speaker series, gender
diversity tracking and global cultural appreciation
initiatives.
We attract and retain talent by creating
opportunities for professional growth through
leadership development, competitive benefits,
wellness incentives and resources, and innovative
initiatives and trainings.
We Work Together To Strengthen
Our Community
We encourage employee community service and
support through corporate matching programs,
paid time off for volunteering activities, our
Annual Day of Giving, company-sponsored
volunteer opportunities and corporate giving and
fundraising.
In 2020, employees contributed to pandemic
and natural disaster aid in the form of donation
drives and volunteer hours, adding to more
than 51,000 volunteer hours by our employees
since the program’s inception. Encore donated
over $350,000 to charitable organizations, with
$100,000 going to support vulnerable populations
affected by COVID-19.
To find out more, visit: encorecapital.com/social-responsibility-and-sustainability/
1 3
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Awards
Diversity & Inclusion
Volunteerism
Women on Boards 2020 (U.S.)
Winning ‘W’ Company for Female
Board Representation
Corporation for National & Community
Service 2015–2020 (U.S.)
Presidential Volunteer Service Award
Working Mother Media and AVTAR Group
2018–2020 (India)
100 Best Companies for Women &
Champions of Inclusion
Kent Messenger Volunteering Awards
2019 (U.K.)
Top Employer Assisted Volunteer Team
Customer Service Excellence
Employee Advocacy
Credit Strategy, Collections and Customer
Service Awards 2020 (U.K.)
Best Legal Services
Mortimer Clarke Solicitors, part of Cabot
Credit-Connect, Credit and Collections
Technology Awards 2020 (U.K.)
Contact Centre Solution
Credit Strategy, Collections and Customer
Service Awards 2019 (U.K.)
Best Vulnerable Customer Support
Strategy
Credit Awards 2019 (U.K.)
Debt Purchaser of the Year
National Contact Centre Awards 2020
(Wescot) (U.K.)
Silver Team Manager Award
Credit Awards 2020 (U.K.)
Best Company to Work for
Service Provider
National Contact Centre Awards 2020
(Wescot) (U.K.)
Team Leader/Manager of the Year - Bronze
Institute of Customer Service, Satisfaction
Awards 2019 (U.K.)
Employee Engagement Strategy of
the Year
Institute of Customer Service 2019 (U.K.)
ICS Service Mark
Great Place to Work 2019 (India)
India’s Best Workplaces
Credit Strategy, Collections and Customer
Service Awards 2019 (U.K.)
Best Vulnerable Customer Strategy
Provider
Credit Strategy, Collections and Customer
Service Awards 2019 (U.K.)
Law Firm of the Year
Mortimer Clarke Solicitors, part of Cabot
Environmental Sustainability
Ministry of Environment and Energy 2020
(Costa Rica)
Blue Flag Ecological Certification
1 4
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT
Our Leadership and
Board of Directors
Executive
Leadership Team
Ashish Masih
President and
Chief Executive Officer
At Encore since 2009
Amy Anuk
Senior Vice President and Managing
Director, Encore Advantage
At Encore since 2002
Ryan Bell
President,
Midland Credit Management, Inc.
At Encore since 2011
Craig Buick
Chief Executive Officer,
Cabot Credit Management
At Encore since 2016
Greg Call
Executive Vice President,
General Counsel and Chief
Administrative Officer
At Encore since 2010
Jonathan Clark
Executive Vice President and
Chief Financial Officer
At Encore since 2014
Monique Dumais-Chrisope
Senior Vice President,
Chief Information Officer
At Encore since 2019
Tracy Ting
Senior Vice President,
Chief Human Resources Officer
At Encore since 2019
John Yung
Senior Vice President, Chief Global
Strategist and Growth Officer
At Encore since 2015
Board of Directors
Michael P. Monaco
Chairman and Director
Served since 2014
Ash Gupta
Director
Chair of the Compensation Committee
Served since 2015
Wendy G. Hannam
Director
Chair of the Risk Committee
Served since 2015
Jeffrey A. Hilzinger
Director
Served since 2019
Angela A. Knight CBE
Director
Chair of the Nominating and Corporate
Governance Committee
Served since 2019
Ashish Masih
Director, President and
Chief Executive Officer
Served since 2017
Laura Newman Olle
Director
Served since 2014
Richard J. Srednicki
Director
Served since 2014
Richard P. Stovsky
Director
Chair of the Audit Committee
Served since 2018
1 5
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Investor and Shareholder
Services Information
Headquarters
Investor Relations Contact
Encore Capital Group, Inc.
Bruce Thomas
350 Camino de la Reina, Suite 100
Vice President, Global Investor Relations
San Diego, CA 92108
877-830-7011
858-309-6442
bruce.thomas@encorecapital.com
Stock Exchange Listing
Annual Report on Form 10-K
Our common stock is listed on
NASDAQ under the symbol ECPG.
A copy of this report is available at
encorecapital.com/sec-filings/
annual-reports/
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
3rd Floor, 6201 15th Avenue
Brooklyn, NY, 11219
718-921-8124
This Annual Report contains certain forward-looking information within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are based on current
expectations and involve inherent risks and uncertainties that could cause actual outcomes and results to
differ materially from current expectations. Please see section “Item 1A—Risk Factors” in the Form 10-K for
the year ended Dec. 31, 2020 for a discussion of the risks, uncertainties and assumptions that could cause
our actual results to differ from those contained in our forward-looking statements.
1 6
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Appendix: Calculation of
Net Debt and ROIC
Non-GAAP Disclosure
Management believes that the presentation of the non-GAAP financial information below is meaningful and
useful in understanding the activities and business metrics of our operations. Management believes that
these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when
viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our
business. Readers should consider the information in addition to, but not instead of, our financial statements
prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated
differently by other companies, limiting the usefulness of these measures for comparative purposes.
Net Debt
Net Debt is GAAP borrowings adjusted for debt issuance costs and debt discounts, cash and cash
equivalents and client cash. Net Debt is a measure commonly used by lenders to our industry to represent
the net borrowings of market participants, and is also used regularly by lenders and others as the numerator
in industry leverage calculations.
(in thousands)
GAAP Borrowings
Debt issuance costs and debt discounts
Cash & cash equivalents
Client cash(1)
Net Debt
Year Ended December 31,
2020
2019
2018
$ 3,281,634
$ 3,513,197
$ 3,490,633
91,859
(189,184)
20,298
73,237
(192,335)
24,964
85,147
(157,418)
21,822
$ 3,204,607
$ 3,419,063
$ 3,440,184
(1) Client cash is cash that was collected on behalf of, and remains payable to, third party clients.
Pre-Tax Return on Invested Capital (ROIC)
Management believes ROIC is a useful financial measure for investors in evaluating the efficient and
effective use of capital, and is an important component of long-term shareholder return. Management uses
ROIC as a measure to monitor and evaluate operating performance relative to our invested capital. ROIC is
calculated as last twelve months adjusted income from operations, divided by our average invested capital.
Adjusted income from operations excludes acquisition, integration and restructuring related expenses,
amortization of certain acquired intangible assets and other charges or gains that are not indicative of
ongoing operations. Average invested capital is defined as the aggregate of average Net Debt, average
GAAP equity and average redeemable noncontrolling interest and is calculated as the sum of current and
prior period ending amounts divided by two.
1 7
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Calculation of ROIC and Net Debt
(in thousands)
Numerator
Income from operations
Adjustments:(1)
CFPB settlement fees(2)
Acquisition, integration and restructuring related expenses(3)
Amortization of certain acquired intangible assets(4)
Goodwill impairment(5)
Net gain on fair value adjustments to contingent considerations(6)
Expenses related to withdrawn Cabot IPO(7)
Year Ended December 31,
2020
2019
2018
$ 533,562
$ 446,345
$ 405,300
15,009
154
7,010
—
—
—
—
7,049
7,017
10,718
(2,300)
—
—
9,041
8,337
—
(5,664)
2,984
Adjusted income from operations
$ 555,735
$ 468,829
$ 419,998
Denominator
Average Net Debt
Average equity
Average redeemable noncontrolling interest
Total invested capital
$ 3,311,835
$ 3,429,624
$ 3,388,336
1,122,741
922,547
695,811
—
—
75,989
$ 4,434,576
$ 4,352,171
$ 4,160,136
Pre-tax ROIC
12.5%
10.8%
10.1%
(1) Adjustments below are to adjust GAAP income from operations and accordingly do not include any amounts related to other income
and expense.
(2) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we
believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future
periods, and our competitors’ results.
(3) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these
expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods,
anticipated future periods, and our competitors’ results.
(4) We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution
service providers. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe
that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and
customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash
static expense that is not affected by operations during any reporting period.
(5) The sale of Baycorp resulted in a goodwill impairment charge during the year ended December 31, 2019. We believe the goodwill
impairment charge is not indicative of ongoing operations, therefore adjusting for this expense enhances comparability to prior periods,
anticipated future periods, and our competitors’ results.
(6) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established
for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is
indicative of ongoing operations.
(7) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. We adjust for this amount
because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances
comparability to prior periods, anticipated future periods, and our competitors’ results.
1 8
ENCORE CAPITAL GROUP 2020 ANNUAL REPORT Encore Capital Group
2020 Form 10-K
Better Solutions. Better Life.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________________________________
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
☐
OF 1934
For the transition period from to .
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
48-1090909
(IRS Employer
Identification No.)
350 Camino De La Reina, Suite 100
San Diego, California 92108
(Address of principal executive offices, including zip code)
(877) 445-4581
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 Par Value Per Share
Trading Symbol(s)
ECPG
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Emerging growth company
☒
☐
Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,058.5 million at June 30, 2020, based on
the closing price of the common stock of $34.18 per share on such date, as reported by NASDAQ.
The number of shares of our Common Stock outstanding at February 17, 2021, was 31,345,569.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement in connection with its annual meeting of stockholders to be held in 2021 are incorporated by
reference in Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which proxy statement
will be filed no later than 120 days after the close of the registrant’s fiscal year December 31, 2020.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1—Business
Item 1A—Risk Factors
Item 1B—Unresolved Staff Comments
Item 2—Properties
Item 3—Legal Proceedings
Item 4—Mine Safety Disclosures
PART II
Item 5—Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A—Quantitative and Qualitative Disclosures about Market Risk
Item 8—Financial Statements and Supplementary Data
Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A—Controls and Procedures
Item 9B—Other Information
PART III
Item 10—Directors, Executive Officers and Corporate Governance
Item 11—Executive Compensation
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13—Certain Relationships and Related Transactions, and Director Independence
Item 14—Principal Accountant Fees and Services
PART IV
Item 15—Exhibits and Financial Statement Schedules
Item 16—Form 10-K Summary
SIGNATURES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Our Business
PART I
Item 1—Business
We are an international specialty finance company providing debt recovery solutions and other related services for
consumers across a broad range of financial assets. We primarily purchase portfolios of defaulted consumer receivables at deep
discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial
recovery. Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit
unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to
bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-
performing loans.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”) we are a market leader in
portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its
subsidiaries and European affiliates (collectively, “Cabot”) we are one of the largest credit management services providers in
Europe and a market leader in the United Kingdom and Ireland. These are our primary operations.
We also have additional international investments and operations as we have explored new asset classes and geographies
including: (1) our investments in non-performing loans in Colombia, Peru and Mexico; and (2) an investment in Encore Asset
Reconstruction Company (“EARC”) in India. We refer to these additional international operations as our Latin America and
Asia-Pacific (“LAAP”) operations.
To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term
growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States
and United Kingdom and strengthening and developing our business in the rest of Europe. As a result, descriptions of our
operations in Part I - Item 1 of this Form 10-K will focus primarily on MCM (United States) and Cabot (Europe) operations.
Throughout this Annual Report on Form 10-K, when we refer to our United States operations, we include accounts
originated in the United States that are serviced through our operations centers in the United States, India and Costa Rica. When
we refer to our international operations, we are referring to accounts originated outside of the United States. Those accounts are
generally serviced in the country of origin.
Company Information
We were incorporated in Delaware in 1999. In June 2013, we completed our merger with Asset Acceptance Capital Corp.,
which was another leading provider of debt recovery solutions in the United States. In July 2013, by acquiring a majority
ownership interest in the indirect holding company of CCM, Janus Holdings S.à r.l., we acquired control of CCM. In February
2014, CCM acquired Marlin Financial Group Limited, a leading acquirer of non-performing consumer debt in the United
Kingdom. In August 2014, we acquired Atlantic Credit & Finance, Inc., which was a market leader in the United States in
buying and collecting on freshly charged-off debt. In June 2015, CCM expanded in the United Kingdom by acquiring Hillesden
Securities Ltd and its subsidiaries (“dlc”). In March 2016, we completed the divestiture of our membership interests in Propel
Acquisition LLC and its subsidiaries, our tax lien business. In November 2017, CCM strengthened its debt servicing offerings
with the acquisition of Wescot Credit Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO
services company. In July 2018, we completed the purchase of all of the outstanding equity of CCM not owned by us. As a
result, CCM became our wholly owned subsidiary.
Our headquarters is located in San Diego, California 92108 and our telephone number is (877) 445-4581. Our website
address is www.encorecapital.com. The site provides access, free of charge, to relevant investor related information, such as our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports that are filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934, press releases, featured articles, an event calendar, and frequently asked questions. SEC
filings are available on our Internet site as soon as reasonably practicable after being filed with, or furnished to, the SEC. Also
available on our website are our Standards of Business Conduct and charters for the committees of our Board of Directors. We
intend to disclose any amendment to, or waiver of, a provision of our Standards of Business Conduct on our website. The
content of our Internet site is not incorporated by reference into this Annual Report on Form 10-K. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC (http://www.sec.gov).
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Our Competitive Advantages
Analytic Strength. We believe that success in our business depends on our ability to establish and maintain an information
and data advantage. Leveraging an industry-leading financially distressed consumer database, our in-house team of statisticians,
business analysts, and software programmers have developed, and continually enhance, proprietary behavioral and valuation
models, custom software applications, and other business tools that guide our portfolio purchases.
We have been able to leverage over 20 years of data, insights, modeling and operational integration. Each year we invest
significant capital to purchase credit bureau and customized consumer data that describe account level and macroeconomic
factors related to credit, savings, and payment behavior. This robust data accumulation from our collection channels and other
sources supports our direct mail, call center and digital collection efforts and our market-leading proprietary scorecards for legal
placements. We leverage these and other powerful statistical models to drive each collection activity.
We have made significant progress in developing our digital collection strategies, which we continue to optimize along
with our collections websites. In developing our digital platform, we have allowed consumers to access account information,
supporting documents and perform payments online. By leveraging direct mail, email and search engines we have bolstered
data accumulation and collections payments through our digital platform. Innovation and investment in digital collection
technology and speech analytics have enhanced our ability to collect and enabled us to quickly adapt to the varying operating
conditions resulting from the COVID-19 pandemic, as they provide real-time insights that help optimize our interaction with
consumers, as well as valuable information for training purposes.
Consumer Intelligence and Principled Intent. Across the full extent of our operations, we strive to treat consumers with
respect, compassion and integrity. From affordable payment plans to hardship solutions, we work with our consumers as they
attempt to return to financial health. We are committed to having a dialogue that is honorable and constructive and hope to play
an important and positive role in our consumers’ financial recovery. We believe that our interests and those of the financial
institutions from which we purchase portfolios are closely aligned with the interests of government agencies seeking to protect
consumer rights. To demonstrate our commitment to conducting business ethically, we developed our Consumer Bill of Rights.
Its articles govern the principled treatment we aim to provide consumers. Operating with a consumer-first approach has built
trust among consumers and issuers of consumer credit, allowing us to improve liquidation and maintain purchasing supply. We
expect to continue to invest in infrastructure and processes that support consumer advocacy and financial literacy while
promoting an appropriate balance between corporate and consumer responsibility.
At the core of our analytic approach is a focus on characterizing our consumers’ willingness and ability to repay their
financial obligations. In this effort, we apply tools and methods from statistics, economics, and management science across the
full extent of our business. During portfolio valuation, we use internally developed proprietary statistical models that determine
the likelihood and expected amount of collections from each consumer within a portfolio. Subsequently, the expectations for
each account are aggregated to arrive at a portfolio-level liquidation model and a valuation for the entire portfolio is
determined. During the collection process, we apply a number of proprietary operational frameworks to match our collection
approach to an individual consumer’s payment behavior.
Our data collection practices and analytics processes are designed with consumer experience in mind. Over time we have
adjusted our execution to optimize lifetime liquidation with a high-touch, focused approach. We connect with the consumer
through extended conversations and offer expanded interaction and payment options. Our analytics infrastructure provides
insights to consumer sentiment, allowing us to tailor our communication and collections efforts to each consumer. This
sustained consumer focus and other operational enhancements have led to improved liquidation effectiveness and fair consumer
treatment.
Regulatory Expertise. Both the U.S. and UK markets have established regulatory systems and compliance requirements,
benefiting scaled market participants such as Encore. Issuers of consumer debt sell charged-off receivables to a select universe
of trusted buyers, further necessitating a robust compliance and regulatory framework. As the cost of compliance increases,
economies of scale are important to the provision of cost effective credit management services. Our established regulatory
framework uniquely positions us to capture new portfolios and realize cost-efficiencies.
Although MCM and Cabot both operate in developed and established credit markets, fundamental differences exist
between the two from the standpoint of the regulatory approach being followed. The U.S. environment is governed by a rules-
based approach which details specific rules on how the company should conduct operations when interacting with consumers.
The UK landscape is principles-based in nature; outcomes and principles are set by the regulators. Parties under their purview
are responsible for determining how to appropriately achieve the stated outcomes and principles. We have strategically
structured our compliance infrastructure at MCM and Cabot to account for these key market-specific factors.
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Many credit providers seek to do business with credit management companies that provide consistent, compliant and
consumer-focused services to protect the credit provider’s own reputation. Encore’s established regulatory and compliance
programs are a key differentiator that enables the Company to successfully and efficiently demonstrate its expertise to credit
providers. MCM averages approximately 35 issuer audits and due diligence exercises per year and has achieved certification
from all major U.S. issuers who sell their charged-off accounts to third parties. Cabot also maintains a leading track record of
regulatory approval and was the first large UK-based credit management service company to receive full FCA authorization.
Strong Capital Stewardship. We continue to maintain a focus on raising and deploying capital prudently to maximize the
return on our invested capital. Our operational scale and geographic diversification enable us to adjust to market trends and
deploy capital to maximize risk-adjusted returns.
Operational Scale and Cost Efficiency. We are a market leader in portfolio purchasing and recovery in the United States
and one of the largest credit management services providers in Europe. This operational scale combined with cost efficiency is
central to our purchasing and collection strategies. We also experience considerable cost advantages stemming from our scale
and focus on collecting in a cost-efficient manner. Our operations in India and Costa Rica have been critical to achieving these
improvements. We are one of the only companies in the industry with a successful, late stage collection platform in India,
which has helped to reduce our call center variable cost-to-collect while maintaining our quality standards.
Our Strategy
Competitive Advantage. We strive to enhance our competitive advantages through innovation, which we expect will result
in collections growth and improved productivity. To continue generating strong risk-adjusted returns, we intend to continue
investing in analytics and technology, risk management and compliance. We will also continue investing in initiatives that
enhance our relationships with consumers, expand our digital capabilities and collections, improve liquidation rates on our
portfolios or reduce costs.
Market Focus. We continue to concentrate on our core portfolio purchasing and recovery business in the U.S. and the
U.K. markets, where scale helps us generate our highest risk-adjusted returns. We believe these markets have attractive
structural characteristics including: (1) a large and consistent flow of purchasing opportunities; (2) a strong regulatory
framework that creates advantages for firms with sufficient financial and operational capabilities ; (3) a high degree of
sophistication and data availability; and (4) stable long term returns and resilience in the event of macroeconomic disruption. In
addition, we are strengthening our presence in Spain, France, Portugal and Ireland, each of which we believe shares a number
of these same attractive market characteristics.
Balance Sheet Strength. We are focused on optimizing our balance sheet while delivering strong financial and operational
results. This includes increasing our cash flow generation through efficient collection operations and applying excess cash
toward reducing our debt, reducing financial leverage. In addition, through our new global funding structure established in
September 2020, we have reduced our funding costs, enhanced our access to capital markets and increased our financial
flexibility, particularly with respect to our ability to allocate capital to our markets with the best risk-adjusted returns.
Our Priority Framework
We have tailored our strategy to optimize our ability to achieve and maintain strong returns throughout the credit cycle.
With respect to our balance sheet, we will strive to maintain financial flexibility and operate with leverage in a range that we
believe benefits the company, and we also target a strong debt rating. Our capital allocation priorities include portfolio
purchases at attractive returns, strategic merger and acquisition (M&A) consideration, and the return of capital to stockholders.
Purchasing Approach
We provide sellers of delinquent receivables liquidity and immediate value through the purchase of charged-off consumer
receivables. We believe that we are a valuable partner to these sellers given our financial strength, focus on principled intent,
and track record of financial success.
Identify purchase opportunities. We maintain relationships with various financial service providers such as banks, credit
unions, consumer finance companies, retailers, utilities companies and government agencies. These relationships frequently
generate recurring purchase opportunities. We identify purchase opportunities and secure, where possible, exclusive negotiation
rights. We believe that we are a valued partner for credit originators from whom we purchase portfolios, and our ability to
secure exclusive negotiation rights is typically a result of our strong relationships and our purchasing scale. Receivable
portfolios are typically sold either through a general auction, in which the seller requests bids from market participants, or in a
private sale where the buyer negotiates directly with a seller. The sale transaction can be either for a one-time spot purchase or
for a “forward flow” contract. A “forward flow” contract is a commitment to purchase receivables over a duration that is
typically three to twelve months, but can be longer, with specifically defined volume, frequency, and pricing. Typically, these
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forward flow contracts have provisions that allow for early termination or price renegotiation should the underlying quality of
the portfolio deteriorate over time or if any particular month’s delivery is materially different than the original portfolio used to
price the forward flow contract. In the U.S., where we have the ability in many of our forward flow contracts to terminate upon
a certain specified amount of notice, we generally attempt to secure forward flow contracts for receivables because a consistent
volume of receivables over a set duration can enable us to more accurately forecast and plan our operational needs.
Evaluate purchase opportunities using analytical models. Once a portfolio of interest is identified, we obtain detailed
information regarding the portfolio’s accounts, including certain information regarding the consumers themselves. We use this
account-level information to perform due diligence and evaluate the portfolio. We use statistical analysis and forecasting to
analyze this information to create expected future cash forecasts for the portfolio. Our collection expectations are based on,
among other things, account characteristics and credit file variables, which we use to predict a consumer’s willingness and
ability to repay their debt. Our servicing strategy and collections channel capacity are also a major determinant of collections
expectations and portfolio expected value. Additional adjustments to cash expectations are made to account for qualitative
factors that may affect the payment behavior of our consumers (such as prior collection activities or the underwriting approach
of the seller), and to ensure our valuations are aligned with our operations.
Formal approval process. Once we have determined the estimated value of the portfolio and have completed our
qualitative due diligence, we present the purchase opportunity to our investment committee, which either sets the maximum
purchase price for the portfolio based on an Internal Rate of Return (“IRR”), or declines to bid. Members of the investment
committee vary based on the type, amount, IRR and jurisdiction of the purchase opportunity, but include our Chief Executive
Officer and Chief Financial Officer for all material purchases.
We believe long-term success is best achieved by combining a diversified asset sourcing approach with an account-level
scoring methodology and a disciplined evaluation process.
Collection Approach
MCM (United States)
We continue to expand and build upon the insight developed from previous collections when developing our account
collection strategies for portfolios we have acquired. We refine our collection approach to determine the most effective
collection strategy to pursue for each account. Our current collection approaches consist of:
•
•
•
Direct Mail and Email. We develop innovative mail and email campaigns offering consumers payment programs,
and occasionally appropriate discounts, to encourage settlement of their accounts.
Call Centers. We maintain domestic collection call centers in Phoenix, Arizona, St. Cloud, Minnesota, Troy,
Michigan, and Roanoke, Virginia and international call centers in Gurgaon, India and San Jose, Costa Rica. Call
centers generally consist of multiple collection departments. Account managers supervised by group managers are
trained and divided into specialty teams. Account managers assess our consumers’ willingness and capacity to pay.
They attempt to work with consumers to evaluate sources and means of repayment to achieve a lump sum settlement
or develop payment programs customized to the individual’s ability to pay. In cases where a payment plan is
developed, account managers encourage consumers to pay through automatic payment arrangements. We
continuously educate account managers to understand and apply applicable laws and policies that are relevant in the
account manager’s daily collection activities. Our ongoing training and monitoring efforts help ensure compliance
with applicable laws and policies by account managers.
Legal Action. We generally refer accounts for legal action when the consumer has not responded to our direct mail
efforts or our calls and it appears the consumer is able, but unwilling, to pay their obligations. When we decide to
pursue legal action, we place the account into our internal legal channel or refer them to our network of retained law
firms. If placed to our internal legal channel, attorneys in that channel will evaluate the accounts and make the final
determination whether to pursue legal action. If referred to our network of retained law firms, we rely on our law
firms’ expertise with respect to applicable debt collection laws to evaluate the accounts placed in that channel in
order to make the decision about whether or not to pursue collection litigation. Prior to engaging an external law
firm (and throughout our engagement of any external law firm), we monitor and evaluate the firm’s compliance with
consumer credit laws and regulations, operations, financial condition, and experience, among other key criteria. The
law firms we hire may also attempt to communicate with the consumers in an attempt to collect their debts prior to
initiating litigation. We pay these law firms a contingent fee based on amounts they collect on our behalf.
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•
•
•
•
Third-Party Collection Agencies. We selectively employ a strategy that uses collection agencies. Collection
agencies receive a contingent fee based on amounts they collect on our behalf. Generally, we use these agencies
when they can generate more collections than our internal call centers or can do so at a lower cost.
Digital Collections. We have made significant progress in developing our digital strategies and continue to analyze
and optimize our digital strategies and our collection website. Currently consumers can access their account
information, view supporting documents and make payments through our website. We leverage direct mail, email,
and search engines to promote our digital channel to our consumers. Account managers in our call centers are also
encouraged to make consumers aware of our digital channels including our website. We expect digital collections to
increase as we continue to develop our digital strategies and more consumers become aware of the digital channel.
Inactive. We strive to use our financial resources judiciously and efficiently by not deploying resources on accounts
where the prospects of collection are remote based on a consumer’s situation.
No Resale. Our policy is to not resell accounts to third parties in the ordinary course of business.
We expand and build upon the insight developed during our purchase process when developing our account collection
strategies for portfolios we have acquired. Our proprietary consumer-level collectability analysis is the primary determinant of
whether an account is actively serviced post-purchase. The channel identification process is analogous to a decision tree where
we first differentiate those consumers who we believe are unable to pay from those who we believe are able to pay. Consumers
who we believe are financially incapable of making any payments, or are facing extenuating circumstances or hardships that
would prevent them from making payments, are excluded from our collection process. It is our practice to attempt to contact
consumers and assess each consumer’s willingness to pay through analytics, phone calls, email and/or letters. If the consumer’s
contact information is unavailable or out of date, the account is routed to our skip tracing process, which includes the use of
different skip tracing companies to provide accurate phone numbers and addresses. The consumers that engage with us are
presented with payment plans that are intended to suit their needs or are sometimes offered discounts on their obligations. For
the consumers that do not respond to our calls, emails or our letters we must then decide whether to pursue collections through
legal action. Throughout our ownership period of accounts, we periodically refine our collection approach to determine the
most effective collection strategy to pursue for each account.
Cabot (Europe)
In Europe, we also use direct mail and email, call centers, legal action, third-party collection agencies and digital methods
to pursue collections.
We use insights developed during our purchasing process to build account collection strategies. Our proprietary
consumer-level collectability analysis is the primary determinant of how an account will be serviced post-purchase. We
continuously refine this analysis to determine the most effective collection strategy to pursue for each account we own. We
purchase both paying portfolios, which consist of accounts where over 50% of the investment value is associated with
consumers who are already repaying some of their debt, albeit at levels that still require the debt to be written off under the
originators’ internal accounting policies, and non-paying portfolios, where 50% or more of the investment value is associated
with consumers who are not repaying some of their debt, which are higher risk and have less predictable cash flows than paying
portfolios. Paying portfolios tend to have a higher purchase price relative to face value than non-paying accounts due to the
higher expectations for collections, as well as lower anticipated collection costs. Non-paying portfolios often consist of a
substantial number of accounts without contact details and for which the vendor has made numerous unsuccessful attempts to
collect.
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We employ a variety of collections strategies from the point of purchase, tailored to both the type of account and the
consumer’s financial strength. For paying accounts, we seek to engage with the consumers to transfer their payment stream to
us and understand their detailed financial situation. For non-paying accounts, we apply a segmentation framework tailoring our
communication and contact intensity in line with our assessment of their credit bureau data, the size of their debt, and whether
we have an existing relationship with them from other accounts. Where contact is made and consumers indicate both a
willingness and ability to pay, we create tailor-made payment plans to suit the consumer’s situation. In doing so, we utilize
U.K. regulatory protocols to assess affordability and ensure their plan is fair, balanced and sustainable. Where we identify
consumers with an ability to pay but who appear to be unwilling to pay their debt due, we pursue a range of collections
strategies, which may include litigation processes in order to stimulate engagement and enable us to agree to a suitable plan.
Scoring is applied in conjunction with manual selection criteria to determine whether litigation might be an option, also
informing any enforcement action that may be deemed most appropriate to the consumer’s situation. Relationships with
consumers are maintained through the duration of the payment plan, seeking to review plans at least annually in order to take
into account fluctuations in consumers’ financial situations. Again, scoring is used to vary the intensity of contact effort,
mirroring the likelihood of a consumer’s financial situation having changed. In the event that a consumer breaks their plan,
segmentation is used to tailor the communication and contact intensity as we seek to re-engage with the consumer and
understand the reason for the break. By understanding the reason for the break we can tailor the solutions we recommend to
rehabilitate the plan and put the consumer back on the path to financial recovery. In this way, we have built strong relationships
with our consumer base with a robust repayment stream, reflected in exceptional customer service scores.
Debt Servicing
Our debt servicing operations, which are primarily performed by subsidiaries of Cabot, include early stage collections,
business process outsourcing and contingent collections for credit originators. We mainly provide debt servicing for consumer
accounts, but also provide services for business-to-business accounts. We believe our debt servicing operations provide us:
exposure to the oversight requirements of financial services clients that drive a continually evolving compliance agenda; access
to proprietary debt purchase opportunities; and an opportunity to support clients across the collections and recoveries lifecycle,
thereby allowing us to remain close to evolving trends.
Seasonality
MCM (United States)
While seasonality does not have a material impact on our business, collections are generally higher in the first three
calendar quarters and are the slowest in the fourth calendar quarter. Relatively higher collections for a quarter can result in a
lower cost-to-collect ratio compared to the other quarters, as our fixed costs are relatively constant and applied against a larger
collection base. The seasonal impact on our business may also be influenced by our purchasing levels, the types of portfolios
we purchase, and our operating strategies.
Collection seasonality can also affect revenue as a percentage of collections, also referred to as our revenue recognition
rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to
quarter based on seasonality, as described above. In quarters with lower collections (e.g., the fourth calendar quarter), the
revenue recognition rate can be higher than in quarters with higher collections (e.g., the first three calendar quarters).
In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger
collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for
each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first three calendar
quarters), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth
calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency
outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.
Cabot (Europe)
While seasonality does not have a material impact on European operations, collections are generally strongest in the
second and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December
holiday season and the New Year holiday, and the related impact on consumers’ ability to repay their balances. This drives a
higher level of payment plan defaults over this period, which are typically repaired across the first quarter of the following year.
The August vacation season in the United Kingdom also has an unfavorable effect on the level of collections, but this is
traditionally compensated for by higher collections in July and September.
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Compliance and Enterprise Risk Management
We have established a compliance management system framework, operational procedures, and governance structures to
enable us to conduct business in accordance with applicable rules, regulations, and guidelines. Our philosophy rests on well-
established risk management principles including a model leveraging three lines of defense. Our first line of defense consists of
business lines or other operating units, whose role is to own and manage risks and associated mitigating controls. Our second
line of defense is comprised of strong legal, compliance, and enterprise risk management functions, who ensure that the
business maintains policies and procedures in compliance with existing laws and regulations, advise the business on assessing
risk and strengthening controls, and provide additional, related support. These second-line functions facilitate oversight by our
management and Board of Directors and are responsible for promoting compliance with applicable laws and regulations,
assisting in formulating and maintaining policies and procedures, and engaging in training, risk assessments, testing,
monitoring, complaint response, compliance audits and corrective actions. Our third line of defense is provided by our internal
audit function, providing independent assurance that both first and second line functions are performing their roles
appropriately within the context of our framework.
Beyond written policies, one of our core internal goals is the adherence to principled intent as it pertains to all consumer
interactions. We believe that it is in our shareholders’ and our employees’ best interest to treat all consumers with the highest
standards of integrity. Specifically, we have strict policies and a code of ethics that guide all dealings with our consumers. Our
employees undergo comprehensive training on legal and regulatory compliance, and we engage in regular call monitoring
checks, data checks, performance reviews, and other operational reviews to ensure compliance with company guidelines.
Credit originators who sell us defaulted consumer receivables routinely conduct examinations of our collection practices
and procedures and typically make reports with recommendations to us as to how they believe we can improve those practices
and procedures. We respond to these reports in the ordinary course of business and make changes to our practices and
procedures that we believe are appropriate to address any issues raised in such reports.
Information Technology
Our Technology. We strive to utilize best of breed technologies throughout our business from our core collection
platforms and decision engines to our enterprise wide predictive dialer capability. Using these industry leading platforms in
conjunction with certain company-specific integrations, provides us with an overall solution that enables us to both interact with
consumers in their preferred manner, such as telephone calls, SMS, email, web chat, etc., as well as monitor such consumer
interactions for compliance with applicable rules and regulations.
Process Control. To provide assurance that our technology solutions continue to operate efficiently and securely, we have
developed strong process and control environments. These governance, risk management, and control protocols govern all areas
of the enterprise: from physical security and cybersecurity, to change management, data protection, and segregation of duties.
Cybersecurity. We divide our cybersecurity and information security functions into the four core tenets that we believe
make up a solid information security practice: (1) security strategy and architecture; (2) operational security; (3) vulnerability
and threat management; and (4) IT governance, risk and controls. We invest in cybersecurity and advanced technologies,
including next generation threat prevention and threat intelligence solutions, to protect our organization and consumer and
proprietary data throughout its life cycle. We believe that our adoption and implementation of leading security frameworks for
the financial services industry and the regulatory environments and geographies in which we operate demonstrates our
commitment to cybersecurity and information security. To ensure the integrity and reliability of our environment, we
periodically engage outside auditors specializing in information technology and cybersecurity to examine and test our operating
systems, technical posture as well as our detection and response capabilities, including our disaster recovery plans.
Competition
The consumer credit recovery industry is highly competitive in the United States, the United Kingdom and throughout
Europe. We compete with a wide range of collection and financial services companies, traditional contingency collection
agencies and in-house recovery departments. Competitive pressures affect the availability and pricing of receivable portfolios,
as well as the availability and cost of qualified recovery personnel.
When purchasing receivables, we compete primarily on the basis of price, the ease of negotiating and closing the
prospective portfolio purchases with us, our ability to obtain funding, and our reputation with respect to the quality of services
that we provide. We believe that our ability to compete effectively in this market is also dependent upon, among other things,
our relationships with credit originators and portfolio resellers of charged-off consumer receivables, and our ability to provide
quality collection strategies in compliance with applicable laws.
We believe that smaller competitors in the United States and the United Kingdom are facing difficulties in the portfolio
purchasing market because of the higher cost to operate due to increased regulatory pressure and scrutiny applied by regulators.
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In addition, sellers of charged-off consumer receivables are increasingly sensitive to the reputational risks involved in the
industry and are therefore being more selective with buyers in the marketplace. We believe this favors larger participants in this
market, such as us, that are better able to adapt to these pressures.
Government Regulation
There have been various governmental actions taken, or proposed, in response to the COVID-19 pandemic, such as
limiting debt collection efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain
loans and fees. In addition, in certain jurisdictions courts have closed and/or government actions have affected the litigation
process. Government actions have not been consistent across jurisdictions and the efficacy and ultimate effect of such actions is
not known. We continue to monitor federal, state and international regulatory developments in relation to COVID-19 and their
potential impact on our operations.
MCM (United States)
Our U.S. debt purchasing business and collection activities are subject to federal, state, and municipal statutes, rules,
regulations, and ordinances that establish specific requirements and procedures that debt purchasers and collectors must follow
when collecting consumer accounts, including requirements to obtain and maintain relevant licenses in certain U.S. states in
which we conduct our activities. It is our policy to comply with the provisions of all applicable laws in all of our recovery
activities, including any applicable state licensing requirements. Our failure to comply with these laws or to maintain relevant
state licenses could have a material adverse effect on us to the extent that they limit our recovery activities or subject us to fines
or penalties in connection with such activities.
The federal Fair Debt Collection Practices Act (“FDCPA”) and comparable state and local laws establish specific
requirements and procedures that debt collectors must follow when communicating with consumers, including the time, place
and manner of the communications, and prohibit unfair, deceptive, or abusive debt collection practices. Pursuant to the Dodd-
Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (the “Dodd-Frank Act”), Congress transferred the
Federal Trade Commission’s (“FTC”) role of administering the FDCPA to the Consumer Financial Protection Bureau
(“CFPB”), along with certain other federal statutes, and gave the CFPB authority to implement regulations under the FDCPA.
The FTC and the CFPB share enforcement responsibilities under the FDCPA.
In addition to the FDCPA, the federal laws that directly or indirectly apply to our business (including the regulations that
implement these laws) include, but are not limited to, the following:
•
•
•
•
•
•
•
•
Dodd-Frank Act, including the Consumer Financial
Protection Act (Title X of the Dodd-Frank Act,
“CFPA”)
Electronic Fund Transfer Act and the CFPB’s
Regulation E
Equal Credit Opportunity Act and the CFPB’s
Regulation B
Fair Credit Billing Act
Fair Credit Reporting Act (“FCRA”) and the
CFPB’s Regulation V
Federal Trade Commission Act (“FTCA”)
Gramm-Leach-Bliley Act and the CFPB’s
Regulation P
Health Insurance Portability and Accountability Act
•
•
•
Servicemembers’ Civil Relief Act
Telephone Consumer Protection Act (“TCPA”)
Truth In Lending Act and the CFPB’s Regulation Z
U.S. Bankruptcy Code
•
• Wire Act
•
•
Credit CARD Act
Foreign Corrupt Practices Act
The Dodd-Frank Act was adopted to reform and strengthen regulation and supervision of the U.S. financial services
industry. It contains comprehensive provisions governing the oversight of financial institutions, some of which apply to us.
Among other things, the Dodd-Frank Act established the CFPB, which has broad authority to implement and enforce “federal
consumer financial law,” as well as authority to examine financial institutions, including credit issuers that may be sellers of
receivables and debt buyers and collectors such as us, for compliance with federal consumer financial law. The CFPB has broad
authority to prevent unfair, deceptive, or abusive acts or practices by issuing regulations or by using its enforcement authority
without first issuing regulations. State Attorneys General and state financial regulators have authority to enforce the CFPA’s
general prohibitions against unfair, deceptive, or abusive acts or practices, as well as state-specific prohibitions against unfair or
deceptive acts or practices. Additionally, the FTCA prohibits unfair and deceptive acts or practices in connection with a trade or
business and gives the FTC enforcement authority to prevent and redress violations of this prohibition.
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The Dodd-Frank Act also gave the CFPB supervisory and examination authority over a variety of institutions that may
engage in debt collection, including us. Accordingly, the CFPB is authorized to supervise and conduct examinations of our
business practices. The prospect of supervision has increased the potential consequences of noncompliance with federal
consumer financial law.
The CFPB can conduct hearings, adjudication proceedings, and investigations, either unilaterally or jointly with other
state and federal regulators, to determine if federal consumer financial law has been violated. The CFPB has authority to impose
monetary penalties for violations of applicable federal consumer financial laws (including the CFPA, FDCPA, and FCRA,
among other consumer protection statutes), require remediation of practices, and pursue enforcement actions. The CFPB also
has authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as
other kinds of affirmative relief), costs, and monetary penalties ranging from $5,000 per day for ordinary violations of federal
consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. The CFPB
has been active in its supervision, examination and enforcement of financial services companies, including bringing
enforcement actions, imposing fines and mandating large refunds to customers of several financial institutions for practices
relating to debt collection practices.
The CFPB and the FTC continue to devote substantial attention to debt collection activities, and, as a result, the CFPB and
the FTC have brought multiple investigations and enforcement actions against debt collectors for violations of the FDCPA and
other applicable laws. Continued regulatory scrutiny by the CFPB and the FTC over debt collection practices may result in
additional investigations and enforcement actions against the debt collection industry.
In September 2015, we entered into a consent order (the “2015 Consent Order”) with the CFPB in which we settled
allegations arising from our practices between 2011 and 2015. On September 8, 2020, the CFPB filed a lawsuit alleging that we
violated the 2015 Consent Order. In the lawsuit, the CFPB alleged that we did not perfectly adhere to certain operational
provisions of the 2015 Consent Order, leading to alleged violations of federal consumer financial law.
On October 15, 2020, we entered into a stipulated judgment (“Stipulated Judgment”) with the CFPB to resolve the
lawsuit. The Stipulated Judgment requires us to, among other things: (1) continue to follow a narrow subset of the operational
requirements contained in the 2015 Consent Order, all of which have long been part of our routine practices; (2) pay a $15.0
million civil monetary penalty; and (3) provide redress of approximately $9,000 to 14 affected consumers, which is in addition
to approximately $70,000 of redress that we had previously voluntarily provided. In connection with the Stipulated Judgment,
the CFPB has formally terminated the 2015 Consent Order.
We recorded an after-tax charge of $15.0 million for the year ended December 31, 2020 as a result of the Stipulated
Judgment.
Additionally, we are subject to ancillary state Attorney General investigations related to similar debt collection practices. For
example, in 2018, we also entered into settlement agreements with the Attorneys General of 42 U.S. states and the District of
Columbia in connection with our debt collection and litigation practices.
On October 30, 2020, the CFPB issued final rules in the form of new Regulation F to implement the Fair Debt Collection
Practices Act, which rules restate and clarify prohibitions on harassment and abuse, false or misleading representations, and
unfair practices by debt collectors when collecting consumer debt. The rules included provisions related to, among other things,
the use of newer technologies (text, voicemail and email) to communicate with consumers and limits relating to telephonic
communications. On December 18, 2020, the CFPB also issued an additional debt collection final rule focused on consumer
disclosures. This final rule amends Regulation F to provide additional requirements regarding validation information and
disclosures provided at the outset of debt collection communications, prohibit suits and threats of suits regarding time-barred
debt, and identify actions that must be taken before a debt collector may report information about a debt to consumer reporting
agencies. The rules will each become effective on November 30, 2021. Based on our preliminary assessment of the rules, we
believe that the new rules will not have a material incremental effect on our operations.
In addition, the CFPB has issued guidance in the form of bulletins on debt collection and credit furnishing activities
generally, including one that specifically addresses representations regarding credit reports and credit scores during the debt
collection process, another that focuses on the application of the CFPA’s prohibition of unfair, deceptive, or abusive acts or
practices on debt collection and another that discusses the risks that in-person collection of consumer debt may create in
violating the FDPCA and CFPA. The CFPB also accepts debt collection consumer complaints and released template letters for
consumers to use when corresponding with debt collectors. The CFPB makes publicly available its data on consumer
complaints. The Dodd-Frank Act also mandates the submission of multiple studies and reports to Congress by the CFPB, and
CFPB staff regularly make speeches on topics related to credit and debt. All of these activities could trigger additional
legislative or regulatory action. In addition, the CFPB has engaged in enforcement activity in sectors adjacent to our industry,
impacting credit originators, collection firms, and payment processors, among others. The CFPB’s enforcement activity in these
spaces, especially in the absence of clear rules or regulatory expectations, can be disruptive to third parties as they attempt to
define appropriate business practices. As a result, certain commercial relationships we maintain may be disrupted or impacted
by changes in third-parties’ business practices or perceptions of elevated risk relating to the debt collection industry.
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Our activities are also subject to federal and state laws concerning identity theft, data privacy, and cybersecurity. The
Gramm-Leach-Bliley Act and its implementing regulations require us generally to protect the confidentiality of our consumers’
nonpublic personal information and to disclose to our consumers our privacy policy and practices, including those regarding
sharing consumers’ nonpublic personal information with third parties. In addition, the FCRA requires us to prevent identity
theft and to securely dispose of consumer credit reports. Certain state laws impose similar or stricter privacy obligations as well
as obligations to provide notification of security breaches of personal information to affected individuals, consumer reporting
agencies, businesses and governmental agencies. The applicable regulatory framework for privacy and cybersecurity issues is
evolving and uncertain. For example, the California Consumer Privacy Act (“CCPA”), which became effective January 1,
2020, imposes more stringent requirements on certain businesses with respect to California data privacy. The CCPA includes
provisions that give California residents expanded rights to access and delete certain personal information, opt out of certain
personal information sharing, and receive detailed information about how certain personal information is used. Compliance
with any new or developing privacy laws in the United States, including any state or federal laws, may require significant
resources and subject us to a variety of regulatory and private sanctions.
Our activities are also subject to federal and state laws concerning the use of automated dialing equipment, and other laws
related to consumers and consumer protection. In response to petitions filed by third parties, in July 2015, the Federal
Communications Commission (“FCC”) released a declaratory ruling interpreting the TCPA, which could impact the way
consumers may be contacted on their cellular phones and could impact our operations and financial results. The FCC is
currently engaged in further rulemaking regarding the definition of an automatic telephone dialing system under the TCPA.
In addition to the federal statutes detailed above, many states have general consumer protection statutes, laws, regulations,
or court rules that apply to debt purchasing and collection. In a number of states and cities, we must maintain licenses to
perform debt recovery services and must satisfy ongoing compliance and bonding requirements. It is our policy to comply with
all material licensing, compliance and bonding requirements. Our failure to comply with existing requirements, changing
interpretations of existing requirements, or adoption of new requirements, could subject us to a variety of regulatory and private
sanctions. These could include license suspension or revocation; orders or injunctive relief, including orders providing for
rescission of transactions or other affirmative relief; and monetary relief, including restitution, damages, fines and/or penalties.
In addition, failure to comply with state licensing and compliance requirements could restrict our ability to collect in regions,
subject us to increased regulation, increase our costs, or adversely affect our ability to collect our receivables.
State laws, among other things, also may limit the interest rate and the fees that a credit originator may impose on our
consumers, limit the time in which we may file legal actions to enforce consumer accounts, and require specific account
information for certain collection activities. By way of example, the California Fair Debt Buying Practices Act that directly
applies to debt buyers, applies to accounts sold after January 1, 2014. The law requires debt buyers operating in the state to
have in their possession specific account information before debt collection efforts can begin, among other requirements.
Moreover, the New York State Department of Financial Services issued new debt collection regulations, which took effect in
September 2015 and established new requirements for collecting debt in the state. In addition, other state and local requirements
and court rulings in various jurisdictions may also affect our ability to collect.
The relationship between consumers and credit card issuers is also extensively regulated by federal and state consumer
protection and related laws and regulations. These laws may affect some of our operations because the majority of our
receivables originate through credit card transactions. The laws and regulations applicable to credit card issuers, among other
things, impose disclosure requirements when a credit card account is advertised, when it is applied for and when it is opened, at
the end of monthly billing cycles, and at year-end. Federal law requires, among other things, that credit card issuers disclose to
consumers the interest rates, fees, grace periods, and balance calculation methods associated with their credit card accounts.
Some laws prohibit discriminatory practices in connection with the extension of credit. If the originating institution fails to
comply with applicable statutes, rules, and regulations, it could create claims and rights for consumers that would reduce or
eliminate their obligations related to those receivables. When we acquire receivables, we generally require the credit originator
or portfolio reseller to represent that they have complied with applicable statutes, rules, and regulations relating to the
origination and collection of the receivables before they were sold to us.
Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with
respect to, charges to their credit card accounts that resulted from unauthorized use of their credit cards. These laws, among
others, may give consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to
the receivables, whether or not we committed any wrongful act or omission in connection with the account.
These laws and regulations, and others similar to the ones listed above, as well as laws applicable to specific types of debt,
impose requirements or restrictions on collection methods or our ability to enforce and recover certain of our receivables.
Effects of the law, including those described above, and any new or changed laws, rules, or regulations, and reinterpretation of
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the same, may adversely affect our ability to recover amounts owing with respect to our receivables or the sale of receivables by
creditors and resellers.
Cabot (Europe)
Our operations in Europe are affected by local statutes, rules and regulations. It is our policy to comply with these laws in
all of our recovery activities in Europe, where applicable.
Financial Conduct Authority Regulation. UK debt purchase and services collections businesses are principally regulated
by the Financial Conduct Authority (“FCA”), the UK Information Commissioner’s Office and the UK Office of
Communications. Cabot has three regulated entities in the UK: the debt purchase brand Cabot Credit Management Group
Limited (“CCMG”), the servicing brand Wescot and its law firm, Mortimer Clarke Solicitors (“Mortimer Clarke”). The FCA
regards debt collection as a “high risk” activity primarily due to the potential impact that poor practice can have on already
vulnerable consumers and as a result maintains a high focus on the sector. The FCA Handbook sets out the FCA rules and other
provisions. Firms wishing to carry on regulated consumer credit activities must comply with all applicable sections of the FCA
Handbook, including “Treating Customers Fairly” principles, as well as the applicable consumer credit laws and regulations.
The FCA also publishes guidance on various topics from time to time that it expects firms to comply with. In the context of the
COVID-19 pandemic, the FCA has made it clear by way of its guidance to consumer credit and debt management firms that it
expects such firms to adjust policies and lending and collection practices as necessary to accommodate customers that may be
experiencing financial difficulties as a result of the COVID-19 pandemic.
The FCA has applied its rules to consumer credit firms in a number of areas, including its high-level principles and
conduct of business standards. The FCA has significant powers and, as the FCA deepens its understanding of the industry
through continued supervision, it is likely that the regulatory requirements applicable to the debt purchase industry will
continue to increase. In addition, it is likely that the compliance framework that will be needed to continue to satisfy the FCA
requirements will demand continued investment and resources in our compliance governance framework.
One particularly significant regulatory change program was the implementation of the Senior Managers and Certification
Regime (“SMCR”) for UK operations in December 2019. These requirements are designed to drive accountability and risk
ownership within businesses. This directly impacted CCMG’s senior management team and the wider requirements, which are
required to be fully implemented by March 31, 2021, affect the majority of colleagues who need to be aware and adhere to the
required standards of conduct.
Companies authorized by the FCA must be able to demonstrate that they meet the threshold conditions for authorization
and comply on an ongoing basis with the FCA’s high level standards for authorized firms, such as its Principles for Business
(including the principle of ‘‘treating customers fairly’’), and rules and guidance on systems and controls. In addition to the full
authorization of its business with the FCA, CCMG, Wescot and Mortimer Clarke have appointed certain individuals who have
significant control or influence over the management of the respective businesses, known as Senior Management Function
Managers (“SMF Managers”). SMF Managers are subject to statements of principle and codes of practice established and
enforced by the FCA.
The FCA has the ability to, among other things, impose significant fines, ban certain individuals from carrying on trade
within the financial services industry, impose requirements on a firm’s permission, cease certain products from being collected
upon and in extreme circumstances remove permissions to trade.
In addition to the permissions granted originally as part of its FCA authorization, in February 2017, CCMG was granted a
variation of permissions from the FCA in order to administer regulated mortgage contracts.
Consumer protection. The Consumer Credit Act of 1974 (and its related regulations) (the “UK Consumer Credit Act”)
and the UK Consumer Rights Act 2015 set forth requirements for the entry into and ongoing management of consumer credit
arrangements in the United Kingdom. A failure to comply with these requirements can make agreements unenforceable or can
result in a requirement that charged and collected interest be repaid. The FCA undertook a review of the provisions of the UK
Consumer Credit Act and published its Final Report in March 2019 which set out its views on whether the repeal of certain UK
Consumer Credit Act provisions would adversely affect the appropriate degree of protection for consumers. The UK
Government is now tasked with deciding whether to implement any of the FCA’s recommendations.
Data protection. In addition to these regulations on debt collection and debt purchase activities, Cabot must comply with
the General Data Protection Regulation 2016/679 (“GDPR”). This substantially replaced the previous legislation (Data
Protection Act of 1998) and introduced significant changes to the data protection regime including but not limited to: the
conditions for obtaining consent to process personal data; transparency and providing information to individuals regarding the
processing of their personal data; enhanced rights for individuals; notification obligations for personal data breach; and new
supervisory authorities, including a European Data Protection Board (“EDPB”). The GDPR was further enhanced in the UK
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through new UK specific legislation in the form of an updated UK Data Protection Act 2018. Cabot made required changes in
its UK operations across its debt purchasing and servicing businesses to meet the requirements of GDPR. Data Protection
Officer(s) have been appointed and are supported by Privacy Champions at each European/UK site to promote and enforce
good data protection practices.
Ireland. The regulatory regime in Ireland has been subject to significant changes in recent years. In July 2015, the Irish
Parliament introduced the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (as amended, the “2015 Act”),
which requires credit servicing firms to be regulated by the Central Bank of Ireland to ensure regulatory protection for
consumers following the sale of consumer loan portfolios to unregulated entities. Cabot Financial (Ireland) Limited is
authorized by the Central Bank of Ireland under Part V of the Central Bank Act 1997 as amended by the 2015 Act as a Credit
Servicing Firm. As a result, Cabot Financial (Ireland) Limited is subject to the Central Bank of Ireland’s supervisory and
enforcement regime and is subject to various regulatory consumer protection codes. Cabot Financial (Ireland) Limited was
already obligated to ensure compliance with these codes through its contractual agreements to service loans on behalf of various
Irish financial institutions and is audited on a regular basis against such obligations.
In June 2016, the United Kingdom held a referendum in which voters approved the United Kingdom’s withdrawal from
the European Union, commonly referred to as “Brexit.” The United Kingdom formally exited the European Union on January
31, 2020 although an agreement was not reached until the end of the allocated transition period in December 2020. Even though
an agreement has been reached there remains a significant lack of clarity over the terms of the United Kingdom’s future
relationship with the European Union in certain key areas not least Financial Services where a temporary additional transition
period has been assigned while negotiations continue. The full impact of Brexit has yet to be felt and could, among other
outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union,
undermine bilateral cooperation in key policy areas and significantly disrupt trade between the United Kingdom and the
European Union.
In addition, the other markets in which we currently operate (including Spain, Italy, Poland and Portugal) are subject to
local laws and regulations, and we continue to review the required risk and compliance programs to facilitate compliance with
applicable laws and regulations in those markets. Our operations outside the United States are subject to the U.S. Foreign
Corrupt Practices Act, which prohibits U.S. companies and their agents and employees from providing anything of value to a
foreign official for the purposes of influencing any act or decision of these individuals in order to obtain an unfair advantage, to
help, obtain, or retain business.
Human Capital Management
As of December 31, 2020, we had 7,725 employees, of which approximately 20% were in the United States and 80%
were in our international locations. We have no employees in North America represented by a labor union or subject to the
terms of collective bargaining agreements. We have employees in Spain and the United Kingdom who are represented by
collective bargaining agreements. We believe that our relations with our employees in all locations are positive.
Our approach to human capital management starts with a strong foundation anchored in our commitment to values and
ethics. Attracting, developing and retaining talent is critical to executing our strategy and our ability to compete effectively. We
believe in the importance of creating a diverse and inclusive work environment for our employees, supporting their well-being
with fair and market-competitive pay and benefits, and investing in their growth and development.
We also value feedback from our employees and regularly survey them to understand how they feel about the company
and subsequently take appropriate actions and employ employee engagement best practices to improve their work experience.
Commitment to Values and Ethics
We hold our employees to the highest ethical practices and decision making as guided by our Standards of Business
Conduct (the “Standards”), which embody Encore’s Mission, Vision and Values, provide guidance on specific behaviors, and
set the foundation for ethical decision making. Our Standards reflect our commitment to operating in a fair, honest, responsible
and ethical manner and provide direction for reporting complaints in the event of alleged violations of our policies (including
through our Employee Compliance Hotline).
Diversity and Inclusion
At Encore, we are committed to cultivating an inclusive culture that reflects our consumers and our communities, where
our actions and mindset ensure every individual can thrive. We see advancing Diversity and Inclusion as a journey that we will
continually work on to build a better Encore for our employees and other stakeholders. We value diverse viewpoints and
inclusive experiences and strive for balanced representation in our overall organization. We foster a culture of respect and
inclusion in various ways, including offering unconscious bias and diversity training, tracking gender diversity, and celebrating
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diversity through global cultural appreciation initiatives. As of December 31, 2020, approximately 50% of our total workforce
were women.
Financial, Health and Mental Well-Being
We strive to retain and attract the most talented employees by taking a holistic approach to well-being. This includes
competitive compensation and benefits in the form of base salary, short-term incentives, opportunities for long-term incentives,
retirement and financial support, and recognition programs as part of our financial well-being offerings. We also provide
competitive benefits that include comprehensive health and welfare insurance, generous time-off and leave, and programs such
as Employee Assistance Program, paid time off for volunteering activities, and wellness incentives to support the health and
mental well-being of our employees.
In response to the global COVID-19 pandemic, we implemented programs and services that we determined were in the
best interest of our employees, their families, our consumers and business partners, as well as the communities in which we
operate. These include continued work-from-home arrangements for a majority of our employees, reimbursement of certain
home office related expenses, enhanced information technology (IT) support, backup childcare, enhanced medical insurance
coverage, activities and programs supporting mental health, and regular communications and updates to employees.
Growth and Development
We are committed to actively fostering a learning culture and investing in ongoing professional and career development
for our employees. We empower managers and employees with collective accountability for developing themselves and others,
and promote ongoing dialogue, coaching, feedback, and improvement through our performance management practices. We
offer employees an extensive number of programs and tools for their personal and professional development including
instructor-led training courses, leadership development programs, on-demand virtual learning, individual development
planning, mentoring, roles-based functional and technical training, compliance training, peer learning opportunities, and tuition
reimbursement programs. We also aligned our talent and succession planning framework at a global level to support the
development of our internal talent pipeline for current and future organizational needs, and to provide an overall health gauge of
our global talent pool.
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Item 1A—Risk Factors
There are risks and uncertainties in our business that could cause our actual results to differ from those anticipated. We
urge you to read these risk factors carefully in connection with evaluating our business and in connection with the forward-
looking statements and other information contained in this Annual Report on Form 10-K. Any of the risks described herein
could affect our business, financial condition, or future results and the actual outcome of matters as to which forward-looking
statements are made. The list of risks is not intended to be exhaustive, and the order in which the risks appear is not intended as
an indication of their relative weight or importance. Additional risks and uncertainties not currently known to us, or that we
currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results.
Risks Related to Our Business and Industry
The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus have had, and
could continue to have, an impact on our business and results of operations.
The COVID-19 pandemic and resulting containment measures have caused economic and financial disruptions that have
adversely affected, and could continue to affect, our business and results of operations. The extent to which the pandemic will
continue to affect our business and results of operations will depend on future developments that we are not able to predict,
including the duration, spread and severity of the outbreak; the nature, extent and effectiveness of containment measures; the
extent and duration of the effect on the economy; and how quickly and to what extent normal economic and operating
conditions can resume. It is also possible that any adverse impacts of the pandemic and containment measures may continue
once the pandemic is controlled.
The COVID-19 pandemic and resulting containment measures have contributed to among other things:
• Adverse impacts on our daily business operations and our ability to perform necessary business functions, including as
a result of illness or as a result of restrictions on movement, which has caused expected delays in collections;
• Widespread changes to financial and economic conditions of consumers;
• Uncertainty in certain jurisdictions with respect to near-term availability of receivable portfolios that meet our
purchasing standards;
• Governmental actions discussed, proposed or taken to provide forms of relief, such as limiting debt collections efforts
and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees;
•
Impacts on the court system and the legal process, which have impacted our ability to collect through the litigation
process;
• Adverse impacts on third-party service providers;
•
•
Impacts on capital and credit market conditions, which may limit our access to funding, increase our cost of capital,
and affect our ability to meet liquidity needs;
Increased spending on business continuity efforts and readiness efforts for returning to our offices, which may in turn
require that we cut costs and investments in other areas; and
• An increased risk of an information or cyber-security incident, fraud or a failure in the effectiveness of our compliance
programs due to, among other things, an increase in remote work.
On January 1, 2020 we adopted the new accounting standard for Financial Instruments - Credit Losses (or “CECL”). Our
ability to accurately forecast future losses under CECL may be impaired by the significant uncertainty surrounding the
COVID-19 pandemic and containment measures and the lack of comparable precedent. See “Note 1: Ownership, Description of
Business, and Summary of Significant Accounting Policies” to our consolidated financial statements for our accounting policy
under CECL.
We do not yet know the full extent of how the COVID-19 pandemic could affect our business, results of operations and
financial condition. However, the effects could have a material impact on our business and results of operations and heighten
many of the other risks described in this “Risk Factors” section.
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Financial and economic conditions affect the ability of consumers to pay their obligations, which could harm our financial
results.
Economic conditions globally and locally directly affect unemployment and credit availability. Adverse conditions,
economic changes, and financial disruptions place financial pressure on the consumer, which may reduce our ability to collect
on our consumer receivable portfolios and may adversely affect the value of our consumer receivable portfolios. Further,
increased financial pressures on the financially distressed consumer may result in additional regulatory requirements or
restrictions on our operations and increased litigation filed against us. These conditions could increase our costs and harm our
business, financial condition, and operating results.
We may not be able to purchase receivables at favorable prices, which could limit our growth or profitability.
Our ability to continue to operate profitably depends upon the continued availability of receivable portfolios that meet our
purchasing standards and are cost-effective based upon projected collections exceeding our costs. Due, in part, to fluctuating
prices for receivable portfolios, fluctuating supply and competition within the marketplace, there has been considerable
variation in our purchasing volume and pricing from quarter to quarter and we expect that to continue. The volume of our
portfolio purchases may be limited when prices are high and may or may not increase when portfolio pricing is more favorable
to us. Further, our rates of return may decline when portfolio prices are high. We do not know how long portfolios will be
available for purchase on terms acceptable to us, or at all.
The availability of receivable portfolios at favorable prices depends on a number of factors, including:
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volume of defaults in consumer debt;
continued sale of receivable portfolios by originating institutions and portfolio resellers at sufficient volumes and
acceptable price levels;
competition in the marketplace;
our ability to develop and maintain favorable relationships with key major credit originators and portfolio
resellers;
our ability to obtain adequate data from credit originators or portfolio resellers to appropriately evaluate the
collectability of, estimate the value of, and collect on portfolios; and
changes in laws and regulations governing consumer lending, bankruptcy, and collections.
We enter into “forward flow” contracts, which are commitments to purchase receivables on a periodic basis over a
specified period of time in accordance with certain criteria, which may include a specifically defined volume, frequency, and
pricing. In periods of decreasing prices, we may end up paying an amount higher for such debt portfolios in a forward flow
contract than we would otherwise agree to pay at the time for a spot purchase, which could result in reduced returns. We would
likely only be able to terminate such forward flow agreements in certain limited circumstances.
In addition, because of the length of time involved in collecting charged-off consumer receivables on acquired portfolios
and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing
strategies in a timely manner. Ultimately, if we are unable to continually purchase and collect on a sufficient volume of
receivables to generate cash collections that exceed our costs or to generate satisfactory returns, our business, financial
condition and operating results will be adversely affected.
A significant portion of our portfolio purchases during any period may be concentrated with a small number of sellers,
which could adversely affect our volume and timing of purchases.
A significant percentage of our portfolio purchases for any given fiscal quarter or year may be concentrated with a few
large sellers, some of which may also involve forward flow arrangements. We cannot be certain that any of our significant
sellers will continue to sell charged-off receivables to us, that such sales would be on terms or in quantities acceptable to us, or
that we would be able to replace these purchases with purchases from other sellers.
A significant decrease in the volume of portfolio available from any of our principal sellers would force us to seek
alternative sources of charged-off receivables.
We may be unable to find alternative sources from which to purchase charged-off receivables, and even if we could
successfully replace these purchases, the search could take time and the receivables could be of lower quality, cost more, or
both, any of which could adversely affect our business, financial condition and operating results.
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We face intense competition that could impair our ability to maintain or grow our purchasing volumes.
The charged-off receivables purchasing market is highly competitive. We compete with a wide range of other purchasers
of charged-off consumer receivables. To the extent our competitors are able to better maximize recoveries on their assets or are
willing to accept lower rates of return, we may not be able to grow or sustain our purchasing volumes or we may be forced to
acquire portfolios at expected rates of return lower than our historical rates of return. Some of our competitors may obtain
alternative sources of financing at more favorable rates than those available to us, the proceeds from which may be used to fund
expansion and to increase the amount of charged-off receivables they purchase.
We face bidding competition in our acquisition of charged-off consumer receivables. We believe that successful bids are
predominantly awarded based on price and, to a lesser extent, based on service, reputation, and relationships with the sellers of
charged-off receivables. Some of our current competitors, and potential new competitors, may have more effective pricing and
collection models, greater adaptability to changing market needs, and more established relationships in our industry than we do.
Moreover, our competitors may elect to pay prices for portfolios that we determine are not economically sustainable and, in that
event, we may not be able to continue to offer competitive bids for charged-off receivables.
If we are unable to develop and expand our business or to adapt to changing market needs as well as our current or future
competitors, we may experience reduced access to portfolios of charged-off consumer receivables in sufficient face value
amounts at appropriate prices, which could adversely affect our business, financial condition and operating results.
We may purchase receivable portfolios that are unprofitable or we may not be able to collect sufficient amounts to recover
our costs and to fund our operations.
We acquire and service charged-off receivables that the obligors have failed to pay and the sellers have deemed
uncollectible and have written off. The originating institutions and/or portfolio resellers generally make numerous attempts to
recover on these nonperforming receivables, often using a combination of their in-house collection and legal departments, as
well as third-party collection agencies. In order to operate profitably over the long term, we must continually purchase and
collect on a sufficient volume of charged-off receivables to generate revenue that exceeds our costs. These receivables are
difficult to collect, and we may not be successful in collecting amounts sufficient to cover the costs associated with purchasing
the receivables and funding our operations. If we are not able to collect on these receivables, collect sufficient amounts to cover
our costs or generate satisfactory returns, this may adversely affect our business, financial condition and operating results.
We may experience losses on portfolios consisting of new types of receivables or receivables in new geographies due to our
lack of collection experience with these receivables, which could harm our business, financial condition and operating
results.
We continually look for opportunities to expand the classes of assets that make up the portfolios we acquire. Therefore,
we may acquire portfolios consisting of assets with which we have little or no collection experience or portfolios of receivables
in new geographies where we do not historically maintain an operational footprint. Our lack of experience with these assets
may hinder our ability to generate expected levels of profits from these portfolios. Further, our existing methods of collections
may prove ineffective for these new receivables, and we may not be able to collect on these portfolios. Our inexperience with
these receivables may have an adverse effect on our business, financial condition and operating results.
The statistical models we use to project remaining cash flows from our receivable portfolios may prove to be inaccurate and,
if so, our financial results may be adversely affected.
We use internally developed models to project the remaining cash flows from our receivable portfolios. These models
consider known data about our consumers’ accounts, including, among other things, our collection experience and changes in
external consumer factors, in addition to data known when we acquire the accounts. Our models also consider data provided by
third parties including public sources. We may not be able to achieve the collections forecasted by our models. Our models may
not appropriately identify or assess all material factors and yield correct or accurate forecasts as our historical collection
experience may not reflect current or future realities. We also have no control over the accuracy of information received from
third parties. If such information is not accurate our models may not accurately project estimated remaining cash flows. If we
are not able to achieve the levels of forecasted collection, our revenues will be reduced or we may be required to record a
charge, which may adversely affect our business, financial condition and operating results.
A significant portion of our collections relies upon our success in individual lawsuits brought against consumers and our
ability to collect on judgments in our favor.
We generate a significant portion of our revenue by collecting on judgments that are granted by courts in lawsuits filed
against consumers. A decrease in the willingness of courts to grant these judgments, a change in the requirements for filing
these cases or obtaining these judgments, or a decrease in our ability to collect on these judgments could have an adverse effect
on our business, financial condition and operating results. As we increase our use of the legal channel for collections, our short-
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term margins may decrease as a result of an increase in upfront court costs and costs related to counter claims. We may not be
able to collect on certain aged accounts because of applicable statutes of limitations and we may be subject to adverse effects of
regulatory changes. Further, courts in certain jurisdictions require that a copy of the account statements or applications be
attached to the pleadings in order to obtain a judgment against consumers. If we are unable to produce those account
documents, these courts could deny our claims, and our business, financial condition and operating results may be adversely
affected.
Increases in costs associated with our collections through collection litigation can raise our costs associated with our
collection strategies and the individual lawsuits brought against consumers to collect on judgments in our favor.
We have substantial collection activity through our legal collections channel and, as a consequence, increases in upfront
court costs, costs related to counterclaims, and other court costs may increase our total cost in collecting on accounts in this
channel, which may have an adverse effect on our business, financial condition and operating results.
Our business, financial condition and operating results may be adversely affected if consumer bankruptcy filings increase or
if bankruptcy laws change.
Our business model may be uniquely vulnerable to an economic recession, which typically results in an increase in the
amount of defaulted consumer receivables, thereby contributing to an increase in the amount of personal bankruptcy filings.
Under certain bankruptcy filings, a consumer’s assets are sold to repay credit originators, with priority given to holders of
secured debt. Since the defaulted consumer receivables we purchase are generally unsecured, we often are not able to collect on
those receivables. In addition, since we purchase receivables that may have been delinquent for a long period of time, this may
be an indication that many of the consumers from whom we collect will be unable to pay their debts going forward and are
more likely to file for bankruptcy in an economic recession. Furthermore, potential changes to existing bankruptcy laws could
contribute to an increase in consumer bankruptcy filings. We cannot be certain that our collection experience would not decline
with an increase in consumer bankruptcy filings. If our actual collection experience with respect to a defaulted consumer
receivable portfolio is significantly lower than we projected when we purchased the portfolio, our business, financial condition
and operating results could be adversely affected.
We are subject to audits conducted by sellers of debt portfolios and may be required to implement specific changes to our
policies and practices as a result of adverse findings by such sellers as a part of the audit process, which could limit our
ability to purchase debt portfolios from them in the future, which could materially and adversely affect our business.
Pursuant to purchase contracts, we are subject to audits that are conducted by sellers of debt portfolios. Such audits may
occur with little notice and the assessment criteria used by each seller varies based on their own requirements, policies and
standards. Although much of the assessment criteria is based on regulatory requirements, we may be asked to comply with
additional terms and conditions that are unique to particular debt originators. From time to time, sellers may believe that we are
not in compliance with certain of their criteria and in such cases, we may be required to dedicate resources and to incur
expenses to address such concerns, including the implementation of new policies and procedures. In addition, to the extent that
we are unable to satisfy the requirements of a particular seller, such seller could remove us from their panel of preferred
purchasers, which could limit our ability to purchase debt portfolios from that seller in the future, which could adversely affect
our business, financial condition and operating results.
We rely on third parties to provide us with services in connection with certain aspects of our business, and any failure by
these third parties to perform their obligations, or our inability to arrange for alternative third-party providers for such
services, could have an adverse effect on our business, financial condition and operating results.
We use outside collection services to collect a substantial portion of our charged-off receivables. We are dependent upon
the efforts of third-party service providers including collection agencies, law firms, data providers, tracing service providers and
other servicers to help service and collect our charged-off receivables. Our third-party servicers could fail to perform collection
services for us adequately, remit those collections to us or otherwise perform their obligations adequately. In addition, one or
more of those third-party service providers could cease operations abruptly or become insolvent, or our relationships with such
third-party service providers may otherwise change adversely. Further, we might not be able to secure replacement third-party
service providers or promptly transfer account information to our new third-party service provider or in-house in the event our
agreements with our third-party collection agencies and attorneys were terminated. In addition, to the extent these third-party
service providers violate laws, other regulatory requirements or their contractual obligations, or act inappropriately in the
conduct of their business, our business and reputation could be negatively affected or penalties could be directly imposed upon
us. Any of the foregoing factors could cause our business, financial condition and operating results to be adversely affected.
We have entered into agreements with third parties to provide us with services in connection with our business, including
payment processing, credit card authorization and processing, payroll processing, record keeping for retirement and benefit
plans and certain information technology functions. Any failure by a third party to provide us with contracted services on a
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timely basis or within service level expectations and performance standards may have an adverse effect on our business,
financial condition and operating results. In addition, we may be unable to find, or enter into agreements with, suitable
replacement third party providers for such services, which could adversely affect our business, financial condition and operating
results.
We are dependent on our data gathering systems and proprietary consumer profiles, and if access to such data was lost or
became public, our business could be materially and adversely affected.
Our models and consumer databases provide information that is critical to our business. We rely on data provided to us by
multiple credit reference agencies, our servicing partners and other sources in order to operate our systems, develop our
proprietary consumer profiles and run our business generally. If these credit reference agencies were to terminate their
agreements or stop providing us with data for any reason, for example, due to a change in governmental regulation, or if they
were to considerably raise the price of their services, our business could be materially and adversely affected. Also, if any of the
proprietary information or data that we use became public, for example, due to a change in government regulations, we could
lose a significant competitive advantage and our business could be negatively impacted.
If we become unable to continue to acquire or use information and data in the manner in which it is currently acquired and
used, or if we were prohibited from accessing or aggregating the data in these systems or profiles for any reason, we may lose a
significant competitive advantage, in particular if our competitors continue to be able to acquire and use such data, and our
business could be materially and adversely affected.
If our technology and telecommunications systems were to fail, or if we are not able to successfully anticipate, invest in, or
adopt technological advances within our industry, it could have an adverse effect on our operations.
Our success depends in large part on sophisticated computer and telecommunications systems. The temporary or
permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating
malfunction, software virus, or service provider failure, could disrupt our operations. In the normal course of our business, we
must record and process significant amounts of data quickly and accurately to properly bid on prospective acquisitions of
receivable portfolios and to access, maintain, and expand the databases we use for our collection activities. Any simultaneous
failure of our information systems and their backup systems would interrupt our business operations.
In addition, our business relies on computer and telecommunications technologies, and our ability to integrate new
technologies into our business is essential to our competitive position and our success. We may not be successful in
anticipating, investing in, or adopting technological changes on a timely or cost-effective basis. Computer and
telecommunications technologies are evolving rapidly and are characterized by short product life cycles.
We continue to make significant modifications to our information systems to ensure that they continue to be adequate for
our current and foreseeable demands and continued expansion, and our future growth may require additional investment in
these systems. These system modifications may exceed our cost or time estimates for completion or may be unsuccessful. If we
cannot update our information systems effectively, our business, financial condition and operating results may be adversely
affected.
In the event of a cyber security breach or similar incident, our business and operations could suffer.
We rely on information technology networks and systems to process and store electronic information. We collect and
store sensitive data, including personally identifiable information of our consumers, on our information technology networks.
Despite the implementation of security measures, our information technology networks and systems have been, and in the
future may be, vulnerable to disruptions and shutdowns due to attacks by hackers or breaches due to malfeasance by
contractors, employees and others who have access to our networks and systems. The occurrence of any of these cyber security
events could compromise our networks and the information stored on our networks could be accessed. Any such access could
disrupt our operations, adversely affect the willingness of sellers to sell to us or result in legal claims, liability, reputational
damage or regulatory penalties under laws protecting the privacy of personal information, any of which could adversely affect
our business, financial condition and operating results.
We have significant international operations, which exposes us to additional risks and uncertainties.
Our international operations subject us to a number of additional risks and uncertainties, including:
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compliance with and changes in international laws, including regulatory and compliance requirements that could
affect our business;
differing accounting standards and practices;
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increased exposure to U.S. laws that apply abroad, such as the Foreign Corrupt Practices Act, and exposure to
other anti-corruption laws such as the U.K. Bribery Act;
social, political and economic instability or recessions;
fluctuations in foreign economies and currency exchange rates;
difficulty in hiring, staffing and managing qualified and proficient local employees and advisors to run
international operations;
the difficulty of managing and operating an international enterprise, including difficulties in maintaining effective
communications with employees due to distance, language, and cultural barriers;
difficulties implementing and maintaining effective internal controls and risk management and compliance
initiatives;
potential disagreements with our joint venture business partners;
differing labor regulations and business practices; and
foreign and, in some circumstances, U.S. tax consequences.
Each of these could adversely affect our business, financial condition and operating results.
We may not be able to adequately protect the intellectual property rights upon which we rely and, as a result, any lack of
protection may diminish our competitive advantage.
We rely on proprietary software programs and valuation and collection processes and techniques, and we believe that
these assets provide us with a competitive advantage. We consider our proprietary software, processes, and techniques to be
trade secrets, but they are not protected by patent or registered copyright. We may not be able to protect our technology and
data resources adequately, which may diminish our competitive advantage, which may, in turn, adversely affect our business,
financial condition and operating results.
The United Kingdom’s exit from the European Union could have a material adverse effect on our business, financial
condition and results of operations.
In June 2016, the United Kingdom held a referendum in which voters approved the United Kingdom’s exit from the E.U.,
commonly referred to as “Brexit.” The United Kingdom formally exited the European Union on January 31, 2020 although an
agreement was not reached until the end of the allocated transition period in December 31, 2020. Even though an agreement has
been reached there remains a significant lack of clarity over the terms of the United Kingdom’s future relationship with the
European Union in certain key areas including financial services where a temporary additional transition period has been
assigned while negotiations continue.
These developments may have a material adverse effect on global economic conditions and the stability of global
financial markets, and may significantly reduce global market liquidity, restrict the ability of key market participants to operate
in certain financial markets or restrict our access to capital. In addition, Brexit has caused, and may continue to cause, both
significant volatility in global stock markets and currency exchange rate fluctuations, as well as create significant uncertainty
among United Kingdom businesses and investors. In particular, the pound sterling has lost a significant amount of its value
against the U.S. dollar and the euro respectively since the referendum. We generate a significant portion of our earnings in the
United Kingdom, and any significant change in the value of the pound and/or recession in the United Kingdom or any of the
foregoing factors could have a material adverse effect on our business, financial condition and operating results.
Exchange rate fluctuations could adversely affect our business, financial condition and operating results.
Because we conduct some business in currencies other than U.S. dollars, primarily the British Pound, but report our
financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates upon translation of these business
results into U.S. dollars. In the normal course of business, we may employ various strategies to manage these risks, including
the use of derivative instruments. These strategies may not be effective in protecting us against the effects of fluctuations from
movements in foreign exchange rates. Fluctuations in the foreign currency exchange rates could adversely affect our financial
condition and operating results.
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Risks Related to Government Regulation and Litigation
Our business is subject to extensive laws and regulations, which have increased and may continue to increase.
As noted in detail in “Item 1 - Part 1 - Business - Government Regulation” of this Annual Report on Form 10-K, extensive
laws and regulations directly apply to key portions of our business. These laws and regulations are also subject to review from
time to time and may be subject to significant change. Changes in laws and regulations applicable to our operations, or the
manner in which they are interpreted or applied, could limit our activities in the future or could significantly increase the cost of
regulatory compliance. These negative effects could result from changes in collection laws and guidance, laws related to credit
reporting, consumer bankruptcy laws, laws related to the management and enforcement of consumer debt, court and
enforcement procedures, the statute of limitation for debts, accounting standards, taxation requirements, employment laws,
communications laws, data privacy and protection laws, anti-bribery and corruption laws and anti-money laundering laws. For
example, on October 30, 2020, the CFPB issued final rules in the form of new Regulation F to implement the Fair Debt
Collection Practices Act, which rules restate and clarify prohibitions on harassment and abuse, false or misleading
representations, and unfair practices by debt collectors when collecting consumer debt. The rules included provisions related to,
among other things, the use of newer technologies (text, voicemail and email) to communicate with consumers and limits
relating to telephonic communications. On December 18, 2020, the CFPB also announced that it issued an additional debt
collection final rule focused on consumer disclosures. This final rule amends Regulation F to provide additional requirements
regarding validation information and disclosures provided at the outset of debt collection communications, prohibit suits and
threats of suits regarding time-barred debt, and identify actions that must be taken before a debt collector may report
information about a debt to consumer reporting agencies. The rules will each become effective on November 30, 2021.
We sometimes purchase accounts in asset classes that are subject to industry-specific and/or issuer-specific restrictions
that limit the collection methods that we can use on those accounts. Further, we have seen a trend in laws, rules and regulations
requiring increased availability of historic information about receivables in order to collect. If credit originators or portfolio
resellers are unable or unwilling to meet these evolving requirements, we may be unable to collect on certain accounts. Our
inability to collect sufficient amounts from these accounts, through available collection methods, could adversely affect our
business, financial condition and operating results.
In addition, the CFPB has engaged in enforcement activity in sectors adjacent to our industry, impacting credit
originators, collection firms, and payment processors, among others. Enforcement activity in these spaces by the CFPB or
others, especially in the absence of clear rules or regulatory expectations, may be disruptive to third parties as they attempt to
define appropriate business practices. As a result, certain commercial relationships we maintain may be disrupted or impacted
by changes in third-parties’ business practices or perceptions of elevated risk relating to the debt collection industry, which
could reduce our revenues, or increase our expenses, and consequently adversely affect our business, financial condition and
operating results.
Additional consumer protection or privacy laws, rules and regulations may be enacted, or existing laws, rules or
regulations may be reinterpreted or enforced in a different manner, imposing additional restrictions or requirements on the
collection of receivables.
Any of the developments described above may adversely affect our ability to purchase and collect on receivables and may
increase our costs associated with regulatory compliance, which could adversely affect our business, financial condition and
operating results.
Failure to comply with government regulation could result in the suspension, termination or impairment of our ability to
conduct business, may require the payment of significant fines and penalties, or require other significant expenditures.
The U.S. collections industry is heavily regulated under various federal, state, and local laws, rules, and regulations. Many
states and several cities require that we be licensed as a debt collection company. The CFPB, FTC, state Attorneys General and
other regulatory bodies have the authority to investigate a variety of matters, including consumer complaints against debt
collection companies, and can bring enforcement actions and seek monetary penalties, consumer restitution, and injunctive
relief. If we, or our third-party collection agencies or law firms fail to comply with applicable laws, rules, and regulations,
including, but not limited to, identity theft, privacy, data security, the use of automated dialing equipment, laws related to
consumer protection, debt collection, and laws applicable to specific types of debt, it could result in the suspension or
termination of our ability to conduct collection operations, which would adversely affect us. Further, our ability to collect our
receivables may be affected by state laws, which require that certain types of account documentation be presented prior to the
institution of any collection activities.
Our failure or the failure of third-party agencies and attorneys, or the credit originators or portfolio resellers selling
receivables to us, to comply with existing or new laws, rules, or regulations could limit our ability to recover on receivables,
affect the willingness of financial institutions to sell portfolios to us, cause us to pay damages to consumers or result in fines or
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penalties, which could reduce our revenues, or increase our expenses, and consequently adversely affect our business, financial
condition and operating results. For example, on September 8, 2020, the CFPB filed a lawsuit alleging that Encore and certain
of its US subsidiaries had violated a consent order (the “2015 Consent Order”) pursuant to which we had previously settled
allegations raised by the CFPB arising from practices during the period between 2011 and 2015. In the lawsuit, the CFPB
alleged that we did not perfectly adhere to certain operational provisions of the 2015 Consent Order, leading to alleged
violations of federal consumer financial law. On October 15, 2020, we entered into a stipulated judgment (“Stipulated
Judgment”) with the CFPB to resolve the lawsuit. The Stipulated Judgment requires us to, among other things: (1) continue to
follow a narrow subset of the operational requirements contained in the 2015 Consent Order, all of which have long been part
of the Company’s routine practices; (2) pay a $15.0 million civil monetary penalty; and (3) provide redress of approximately
$9,000 to 14 affected consumers, which is in addition to approximately $70,000 of redress that the Company had previously
voluntarily provided.
In addition, new federal, state or local laws or regulations, or changes in the ways these rules or laws are interpreted or
enforced, could limit our activities in the future and/or significantly increase the cost of regulatory compliance.
Our operations outside the United States are subject to foreign and U.S. laws and regulations that apply to our
international operations, including GDPR, the U.K. Consumer Credit Act, the Foreign Corrupt Practices Act, the U.K. Bribery
Act and other local laws prohibiting corrupt payments to government officials. Violations of these laws and regulations could
result in fines and penalties, criminal sanctions, prohibitions on the conduct of our business and reputational damage.
The debt purchase and collections sector and the broader consumer credit industry in the United Kingdom, Ireland and the
other European jurisdictions in which we operate are also highly regulated under various laws and regulations. This legislation
is principles-based and therefore the interpretation of compliance is complex and may change over time. Failure to comply with
any applicable laws, regulations, rules or contractual compliance obligations could result in investigations, information
gathering, public censures, financial penalties, disciplinary measures, liability and/or enforcement actions, including licenses or
permissions that we need to do business not being granted or being revoked or the suspension or termination of our ability to
conduct collections. In addition, our debt purchase contracts with vendors include certain conditions and failure to comply or
revocation of a permission or authorization, or other actions taken by us that may damage the reputation of the vendor, may
entitle the vendor to terminate any agreements with us. Damage to our reputation, whether because of a failure to comply with
applicable laws, regulations or rules, revocation of a permission or authorization, any other regulatory action or our failure to
comply with contractual compliance obligations, could deter vendors from choosing us as their debt purchase or collections
provider.
Compliance with this extensive regulatory framework is expensive and labor-intensive. Any of the foregoing could have
an adverse effect on our business, financial condition and operating results.
We are subject to ongoing risks of regulatory investigations and litigation, including individual and class action lawsuits,
under consumer credit, consumer protection, theft, privacy, collections, and other laws, and we may be subject to awards of
substantial damages or be required to make other expenditures or change our business practices as a result.
We operate in an extremely litigious climate and currently are, and may in the future be, named as defendants in litigation,
including individual and class action lawsuits under consumer credit, consumer protection, theft, privacy, data security,
automated dialing equipment, debt collections, and other laws. Many of these cases present novel issues on which there is no
clear legal precedent, which increases the difficulty in predicting both the potential outcomes and costs of defending these
cases. We are subject to ongoing risks of regulatory investigations, inquiries, litigation, and other actions by the CFPB, FTC,
FCA, state Attorneys General, Central Bank of Ireland or other governmental bodies relating to our activities. For example, on
September 8, 2020, the CFPB filed a lawsuit alleging that Encore and certain of its US subsidiaries had violated the 2015
Consent Order. On October 15, 2020, we entered into the Stipulated Judgment with the CFPB to resolve the lawsuit. These
litigation and regulatory actions involve potential compensatory or punitive damage claims, fines, costs, sanctions, civil
monetary penalties, consumer restitution, or injunctive relief, as well as other forms of relief, that could require us to pay
damages, make other expenditures or result in changes to our business practices. Any changes to our business practices could
result in lower collections, increased cost to collect or reductions in estimated remaining collections. Actual losses incurred by
us in connection with judgments or settlements of these matters may be more than our associated reserves. Further, defending
lawsuits and responding to governmental inquiries or investigations, regardless of their merit, could be costly and divert
management’s attention from the operation of our business. All of these factors could have an adverse effect on our business,
financial condition and operating results.
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Negative publicity associated with litigation, governmental investigations, regulatory actions, cyber security breaches and
other public statements could damage our reputation.
From time to time there are negative news stories about our industry or company, especially with respect to alleged
conduct in collecting debt from consumers. These stories may follow the announcements of litigation or regulatory actions
involving us or others in our industry. Negative publicity about our alleged or actual debt collection practices, about the debt
collection industry in general or our cyber security could adversely affect our stock price, our position in the marketplace in
which we compete, and our ability to purchase charged-off receivables, any of which could have an adverse effect on our
business, financial condition and operating results.
Risks Related to Our Indebtedness and Common Stock
Our significant indebtedness could adversely affect our financial health and could harm our ability to react to changes to
our business.
As described in greater detail in “Note 7: Borrowings” to our consolidated financial statements, as of December 31, 2020,
our total long-term indebtedness outstanding was approximately $3.3 billion. Our substantial indebtedness could have important
consequences to investors. For example, it could:
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•
increase our vulnerability to general economic downturns and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness,
thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general
corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to competitors that have less debt;
increase our exposure to market and regulatory changes that could diminish the amount and value of our inventory
that we borrow against under our secured credit facilities; and
limit, along with the financial and other restrictive covenants contained in the documents governing our
indebtedness, our ability to borrow additional funds, make investments and incur liens, among other things.
Any of these factors could adversely affect our business, financial condition and operating results.
Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our
business to pay our substantial indebtedness.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness or to make
cash payments in connection with any conversion or exchange of our convertible notes or exchangeable notes, respectively,
depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control.
Our business may not continue to generate cash flow from operations in the future sufficient to service our indebtedness and
make necessary capital expenditures. If we are unable to generate adequate cash flow, we may be required to adopt one or more
alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be
onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial
condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms,
which could result in a default on our debt obligations which could, in turn, adversely affect our business, financial condition
and operating results.
Despite our current indebtedness levels, we may still incur substantially more indebtedness or take other actions which
would intensify the risks discussed above.
Despite our current consolidated indebtedness levels, we and our subsidiaries may be able to incur substantial additional
indebtedness in the future. We are not restricted under the terms of the indentures governing our convertible notes or
exchangeable notes from incurring additional indebtedness, securing existing or future indebtedness, recapitalizing our
indebtedness or taking a number of other actions that could have the effect of diminishing our ability to make payments on our
indebtedness. Although our credit facilities and other existing debt currently limit the ability of us and certain of our
subsidiaries to incur certain additional indebtedness, these restrictions are subject to a number of qualifications and exceptions
and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions, including additional
secured indebtedness, could be substantial. Also, these restrictions will not prevent us from incurring obligations that do not
constitute indebtedness. To the extent new indebtedness or other new obligations are added to our current levels, the risks
described above could intensify.
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We may not be able to continue to satisfy the covenants in our debt agreements.
Our debt agreements impose a number of covenants, including restrictive covenants on how we operate our business.
Failure to satisfy any one of these covenants could result in negative consequences including the following, each of which could
have an adverse effect on our business, financial condition and operating results:
•
•
•
•
•
acceleration or amortization of outstanding indebtedness;
exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding
indebtedness;
our inability to continue to purchase receivables needed to operate our business;
decrease in the level of liquidity that can be accessed under certain of our debt agreements; or
our inability to secure alternative financing on favorable terms, if at all.
In particular, the Global Senior Facility also requires the Company and the guarantors to observe certain customary
affirmative covenants, including three maintenance covenants. These require the Company to ensure that the LTV Ratio (as
defined in the Global Senior Facility) does not exceed 0.75 and the SSRCF Ratio (as defined in the Global Senior Facility) does
not exceed 0.275. The Company is further required to maintain a Fixed Charge Coverage Ratio (as defined in the Global Senior
Facility) of at least 2.0. These financial covenants are, subject in the case of the LTV Ratio to a minimum drawing requirement,
tested quarterly (or with respect to the SSRCF Ratio, monthly). The breach of any of these maintenance covenants could lead to
the consequences referred to above.
Increases in interest rates could adversely affect our business, financial condition and operating results.
Portions of our outstanding debt bear interest at a variable rate. Increases in interest rates could increase our interest
expense which would, in turn, lower our earnings. We may periodically evaluate whether to enter into derivative financial
instruments, such as interest rate swap agreements, to reduce our exposure to fluctuations in interest rates on variable interest
rate debt and their impact on earnings and cash flows. These strategies may not be effective in protecting us against the effects
of fluctuations from movements in interest rates. Increases in interest rates could adversely affect our business, financial
condition and operating results.
Changes in the method pursuant to which LIBOR or EURIBOR rates are determined, including the potential phasing out of
LIBOR after 2021, may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR or
EURIBOR, or our results of operations or financial condition.
As of December 31, 2020, we held $196.4 million notional amount of interest rate swap agreements and $487.7 million
notional amount of interest rate cap contracts that use the London Interbank Offered Rate (“LIBOR”) as a reference rate and
borrowings under our Global Senior Secured Revolving Credit Facility and various other debt obligations bear interest based
upon certain reference rates, including LIBOR and EURIBOR. On July 27, 2017, the FCA, which regulates LIBOR, announced
that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether
new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve
began publishing the Secured Overnight Financing Rate (“SOFR”) in April 2018 as an alternative for LIBOR. SOFR is a broad
measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. A transition away from the
widespread use of LIBOR to SOFR or another benchmark rate may occur over the course of the next few years. Whether or not
SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR currently is uncertain.
As a result, it is not possible to predict the effect of any changes, establishment of alternative references rates or other reforms
to LIBOR or EURIBOR that may be enacted in the U.K. or elsewhere. The elimination of LIBOR or EURIBOR or any other
changes or reforms to the determination or supervision of LIBOR or EURIBOR could have an adverse impact on the market for
or value of any LIBOR or EURIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit
held by or due to us or on our business, financial condition and operating results.
Our common stock price may be subject to significant fluctuations and volatility.
The market price of our common stock has been subject to significant fluctuations. These fluctuations could continue.
Among the factors that could affect our stock price are:
•
•
•
our operating and financial performance and prospects;
our ability to repay our debt;
our access to financial and capital markets to refinance our debt;
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•
•
•
•
•
•
•
•
investor perceptions of us and the industry and markets in which we operate;
future sales of equity or equity-related securities;
changes in earnings estimates or buy/sell recommendations by analysts;
changes in the supply of, demand for or price of portfolios;
our acquisition activity, including our expansion into new markets;
regulatory changes affecting our industry generally or our business and operations;
general financial, domestic, international, economic and other market conditions; and
the number of short positions on our stock at any particular time.
The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated
to the operating performance of companies. The market price of our common stock could fluctuate significantly for many
reasons, including in response to the risks described in this Annual Report on Form 10-K, elsewhere in our filings with the SEC
from time to time or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or
negative announcements by our customers, competitors or suppliers regarding their own performance, as well as industry
conditions and general financial, economic and political instability.
The price of our common stock could also be affected by possible sales of our common stock by investors who view our
convertible notes or exchangeable notes as a more attractive means of equity participation in us and by hedging or arbitrage
trading activity that we expect to develop involving our common stock.
If securities or industry analysts have a negative outlook regarding our stock or our industry, or our operating results do
not meet their expectations, our stock price could decline. The trading market for our common stock is influenced by the
research and reports that industry or securities analysts publish about us. If one or more of the analysts who cover our company
downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.
Future sales of our common stock or the issuance of other equity securities may adversely affect the market price of our
common stock.
In the future, we may sell additional shares of our common stock or other equity or equity-related securities to raise
capital or issue equity securities to finance acquisitions. In addition, a substantial number of shares of our common stock are
reserved for issuance upon conversion of our convertible notes and exchangeable notes and our at-the-market equity offering
program. We are not restricted from issuing additional common stock, including securities that are convertible into or
exchangeable for, or that represent the right to receive, common stock.
The liquidity and trading volume of our common stock is limited. The issuance or sale of substantial amounts of our
common stock or other equity or equity-related securities (or the perception that such issuances or sales may occur) could
adversely affect the market price of our common stock as well as our ability to raise capital through the sale of additional equity
or equity-related securities. We cannot predict the effect that future issuances or sales of our common stock or other equity or
equity-related securities would have on the market price of our common stock.
We may not have the ability to raise the funds necessary to repurchase our notes upon a fundamental change or change of
control or to settle conversions or exchanges in cash, and our future indebtedness may contain limitations on our ability to
pay cash upon conversion of our convertible notes.
Holders of our notes will have the right to require us to repurchase their notes upon the occurrence of a fundamental
change or a change of control at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if
any. In addition, upon a conversion or exchange of notes we will be required to make cash payments for each $1,000 in
principal amount of notes converted or exchanged of at least the lesser of $1,000 and the sum of certain daily conversion
values. However, we may not have enough available cash or be able to obtain financing at the time we are required to make
repurchases of the notes surrendered therefor or to settle conversions or exchanges in cash. In addition, certain of our debt
agreements contain restrictive covenants that limit our ability to engage in specified types of transactions, which may affect our
ability to repurchase our notes. Further, our ability to repurchase our notes or to pay cash upon conversion or exchange may be
limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase the notes
or to pay cash upon conversion or exchange of the notes at a time when the repurchase or cash payment upon conversion or
exchange is required by any indenture pursuant to which the notes were offered would constitute a default under the relevant
indenture. Such default could constitute a default under other agreements governing our indebtedness. If the repayment of any
indebtedness were to be accelerated, we may not have sufficient funds to repay such indebtedness and repurchase the notes.
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Provisions in our charter documents and Delaware law may delay or prevent acquisition of us, which could decrease the
value of shares of our common stock.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a
third party to acquire us without the consent of our Board of Directors. These provisions include advance notice provisions,
limitations on actions by our stockholders by written consent and special approval requirements for transactions involving
interested stockholders. We are authorized to issue up to five million shares of preferred stock, the relative rights and
preferences of which may be fixed by our Board of Directors, subject to the provisions of our articles of incorporation, without
stockholder approval. The issuance of preferred stock could be used to dilute the stock ownership of a potential hostile acquirer.
The provisions that discourage potential acquisitions of us and adversely affect the voting power of the holders of common
stock may adversely affect the price of our common stock and the value of the Convertible Notes.
General
We are dependent on our management team for the adoption and implementation of our strategies and the loss of its
services could have an adverse effect on our business.
Our management team has considerable experience in finance, banking, consumer collections, and other industries. We
believe that the expertise of our executives obtained by managing businesses across numerous other industries has been critical
to the enhancement of our operations. Our management team has created a culture of new ideas and progressive thinking,
coupled with increased use of technology and statistical analysis. The management teams at each of our operating subsidiaries
are also important to the success of their respective operations. The loss of the services of one or more key members of
management could disrupt our collective operations and seriously impair our ability to continue to acquire or collect on
portfolios of charged-off receivables and to manage and expand our business, any of which could have an adverse effect on our
business, financial condition and operating results.
We may make acquisitions that prove unsuccessful and any mergers, acquisitions, dispositions or joint venture activities may
change our business and financial results and introduce new risks.
From time to time, we may make acquisitions of, or otherwise invest in, other companies that could complement our
business, including the acquisition of entities in diverse geographic regions and entities offering greater access to businesses
and markets that we do not currently serve. The acquisitions we make may be unprofitable or may take some time to achieve
profitability. In addition, we may not successfully operate the businesses that we acquire, or may not successfully integrate
these businesses with our own, which may result in our inability to maintain our goals, objectives, standards, controls, policies,
culture, or profitability. Through acquisitions, we may enter markets in which we have limited or no experience. Any
acquisition may result in a potentially dilutive issuance of equity securities, and the incurrence of additional debt which could
reduce our profitability. We also pursue dispositions and joint ventures from time to time. Any such transactions could change
our business lines, geographic reach, financial results or capital structure. Our company could be larger or smaller after any
such transactions and may have a different investment profile.
We may consume resources in pursuing business opportunities, financings or other transactions that are not consummated,
which may strain or divert our resources.
We anticipate that the investigation of various transactions, and the negotiation, drafting, and execution of relevant
agreements, disclosure documents and other instruments with respect to such transactions, will require substantial management
time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made
not to consummate a specific transaction, the costs incurred up to that point for the proposed transaction likely would not be
recoverable. Furthermore, even if an agreement is reached relating to a specific transaction, we may fail to consummate the
transaction for any number of reasons, including those beyond our control. Any such event could consume significant
management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and
our business.
25
None.
Item 1B—Unresolved Staff Comments
Item 2—Properties
We lease office space for our corporate headquarters in San Diego, California. We also lease office space for our call
centers, internal legal and consumer support services in the United States, Europe, and Latin America. We believe that our
current leased facilities are generally well maintained and in good operating condition. We believe that these facilities are
suitable and sufficient for our operational needs. Our policy is to improve, replace, and supplement the facilities as considered
appropriate to meet the needs of our operations.
Item 3—Legal Proceedings
We are involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the
ordinary course of business. Although no assurance can be given with respect to the outcome of these or any other actions and
the effect such outcomes may have, based on our current knowledge, we believe any liability resulting from the outcome of
such disputes, legal actions, regulatory investigations, inquiries, and other actions will not have a material adverse effect on our
business, financial position or results of operations.
For additional information see “Note 12: Commitments and Contingencies” to the consolidated financial statements.
Not applicable.
Item 4—Mine Safety Disclosures
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PART II
Item 5—Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on the NASDAQ Global Select Market under the symbol “ECPG.”
The closing price of our common stock on February 17, 2021, was $32.85 per share and there were 28 stockholders of
record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we
are unable to estimate the total number of beneficial owners of our stock represented by these stockholders of record.
Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the
SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or
Securities Exchange Act of 1934, each, as amended, except to the extent that we specifically incorporate it by reference into
such filing.
The following graph compares the total cumulative stockholder return on our common stock for the period from
December 31, 2015 through December 31, 2020, with the cumulative total return of (a) the NASDAQ Composite Index, (b) a
peer group consisting of Arrow Global, B2Holding, Hoist Finance, Intrum, Kruk and PRA Group, Inc. which we believe are
comparable companies. The comparison assumes that $100 was invested on December 31, 2015, in our common stock and in
each of the comparison indices (including reinvestment of dividends). The stock price performance reflected in the following
graph is not necessarily indicative of future stock price performance.
Encore Capital Group, Inc.
NASDAQ Composite Index
Peer Group
12/15
100.00 $
100.00 $
100.00 $
$
$
$
12/16
98.52 $
108.87 $
105.65 $
12/17
144.77 $
141.13 $
122.53 $
12/18
80.81 $
137.12 $
73.87 $
12/19
121.60 $
187.44 $
95.68 $
12/20
133.94
271.64
90.96
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Dividend Policy
As a public company, we have never declared or paid dividends on our common stock. The declaration, payment, and
amount of future dividends, if any, is subject to the discretion of our Board of Directors, which may review our dividend policy
from time to time in light of the then existing relevant facts and circumstances. Our ability to pay dividends may be restricted
by covenants in certain of the indentures governing our senior secured notes and by the terms of our Global Senior Secured
Revolving Credit Facility. We may also be subject to additional dividend restrictions under future debt agreements or the terms
of securities we may issue in the future.
Share Repurchases
In August 2015, our Board of Directors approved a $50.0 million share repurchase program. Repurchases under this
program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other
factors, in the open market, through private transactions, block transactions, or other methods as determined by the management
and our Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory
requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be
modified or suspended at any time at the Company’s discretion. As of December 31, 2020, we had not made any repurchases
under the share repurchase program.
Recent Sales of Unregistered Securities
None.
Equity Compensation Plan Information
See Item 12—“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
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Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K contains “forward-looking statements” relating to Encore Capital Group, Inc.
(“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the
meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,”
“may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not
limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations,
products or services, and financing needs or plans, as well as assumptions relating to these matters. Although we believe that
the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions
may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-
looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior
management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted
or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many
factors including, but not limited to, those set forth in this Annual Report on Form 10-K under “Part I, Item 1A—Risk Factors,”
could cause our actual results, performance, achievements, or industry results to be very different from the results,
performance, achievements or industry results expressed or implied by these forward-looking statements. Our business,
financial condition, or results of operations could also be materially and adversely affected by other factors besides those
listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to
update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if
experience or future events make it clear that any expected results expressed or implied by these forward-looking statements
will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do
not endorse projections regarding future performance that may be made by third parties.
Our Business
We are an international specialty finance company providing debt recovery solutions and other related services for
consumers across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts
to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery.
Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions,
consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to
bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-
performing loans.
Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists of Midland Credit
Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited
(“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in
Latin America and Asia-Pacific.
MCM (United States)
Through MCM, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico.
Cabot (Europe)
Through Cabot, we are one of the largest credit management services providers in Europe and a market leader in the
United Kingdom and Ireland. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a
range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), and contingent
collections, including through Wescot Credit Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO
services company.
LAAP (Latin America and Asia-Pacific)
We have purchased non-performing loans in Colombia, Peru, Mexico and Brazil (which was sold in April 2020).
Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.
To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term
growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States
and United Kingdom and strengthening and developing our business in the rest of Europe.
Recent Developments
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a
pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and
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restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain
jurisdictions). While we are unable to accurately predict the full impact that COVID-19 will have on our results from
operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of
the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and
could disrupt our business and operations for an indefinite period of time. Through a combination of work-from-home and
social distancing, we remain fully operational in all the markets we serve. As a result of the COVID-19 pandemic and the
resulting containment measures, we have observed, among other things: a decrease in supply of receivable portfolios in the U.S.
driven mainly by a decrease in charge-off rates; a decrease in supply of receivable portfolios in Europe, which we believe is
driven by both a decrease in charge-off rates and decreased sales as the banks focus on their customers’ needs; and impacts to
the legal collections process, which negatively affected legal collections beginning in late March 2020 and could continue to
affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting
containment measures.
Government Regulation
As discussed in more detail under “Part I - Item 1—Business - Government Regulation” contained in this Annual Report
on Form 10-K, our operations in the United States are subject to federal, state and municipal statutes, rules, regulations and
ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting
consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and
prohibitions on unfair, deceptive or abusive debt collection practices. Additionally, our operations in Europe are affected by
foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations,
ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their
administration, which could affect the way we conduct our business.
Portfolio Purchasing and Recovery
MCM (United States)
In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt
portfolios. A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to
Chapter 13 and Chapter 7 bankruptcy proceedings.
We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and
behavioral models across our U.S. operations. These methods and models allow us to value portfolios accurately (and limit the
risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we
purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns
from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the
United States.
Cabot (Europe)
In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan
accounts. We also purchase: (1) portfolios that are in insolvency status, in particular, individual voluntary arrangements; and (2)
non-performing secured mortgage portfolios and real estate assets previously securing mortgage portfolios. When we take
possession of the underlying real estate assets or purchase real estate assets, we refer to those as real estate-owned assets, or
REO assets.
We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level
statistical and behavioral data. This model allows us to value portfolios accurately and quantify portfolio performance in order
to maximize future collections. As a result, we have been able to realize significant returns from the assets we have acquired.
We maintain strong relationships with many of the largest financial services providers in the United Kingdom and continue to
expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other credit management services
providers.
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Purchases and Collections
Portfolio Pricing, Supply and Demand
MCM (United States)
Issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within
six months of the consumer’s account being charged-off by the financial institution. Pricing in the fourth quarter remained
favorable. Issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the
calendar year. We are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply. We have observed a
decrease in supply as a result of the COVID-19 pandemic, but expect supply to ultimately increase.
We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high
cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace. We
believe this favors larger participants, such as us, because the larger market participants are better able to adapt to these
pressures and commit to larger forward flow agreements.
Cabot (Europe)
The U.K. market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over
the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an
integral part of their business models and consumer indebtedness has continued to grow since the financial crisis.
The Spanish debt market continues to be one of the largest in Europe with a significant amount of debt to be sold and
serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium
enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial
institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should
further increase debt purchasing opportunities in Spain.
Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and
supply of portfolios to purchase. Due to the COVID-19 pandemic, banks have decreased portfolio sales in order to focus on
customers’ needs. As a result, we expect a lower level of supply available for purchase in the near-term.
Purchases by Geographic Location
The following table summarizes the geographic locations of receivable portfolios we purchased during the periods
presented (in thousands):
United States
Europe(1)
Other geographies
Total purchases
__________________
Year Ended December 31,
2020
2019
2018
$
$
542,973 $
116,899
—
659,872 $
681,777 $
306,504
11,577
999,858 $
637,881
455,444
38,573
1,131,898
(1) Amounts exclude receivable portfolios purchased and immediately sold to our co-investors under our co-investment framework. In the fourth quarter of
2019, we entered into co-investment framework agreements with certain third-party investors that enabled us to share the investment with co-investors
while providing credit management solutions as the lead servicer for the portfolios.
In the United States, capital deployment decreased during the year ended December 31, 2020, as compared to 2019. The
majority of our deployments in the U.S. are in forward flow agreements, and the timing, contract duration, and volumes for
each contract can fluctuate leading to variation when comparing to prior periods. The decrease in purchases in the U.S. resulted
from a decrease in supply and our cautious approach to purchasing at the beginning of the COVID-19 pandemic when the
potential impacts were relatively unknown. Capital deployment increased for the year ended December 31, 2019, as compared
to 2018, primarily due to higher supply of fresh portfolios in 2019.
In Europe, capital deployment decreased during the year ended December 31, 2020, as compared to 2019. The decrease
was primarily the result of a relatively limited supply of portfolios during the year ended December 31, 2020 and a heightened
return expectation as a result of greater uncertainty relating to the future impact of the COVID-19 pandemic. European capital
deployment also decreased for the year ended December 31, 2019, as compared to 2018. The decrease was primarily the result
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of a more selective purchasing process in conjunction with a plan to reduce European debt leverage over time and the
strengthening of the U.S. dollar against the British Pound.
The average purchase price as a percentage of face value was 11.3%, 8.6%, and 13.3% for the years ended December 31,
2020, 2019, and 2018, respectively. The average purchase price, as a percentage of face value, varies from period to period
depending on, among other factors, the type and quality of the accounts purchased and the length of time from charge-off to the
time we purchase the portfolios. For example, the average purchase price as a percentage of face value is higher for fresh
portfolios as compared to more seasoned portfolios because we generally expect higher collections from fresh paper. Further,
paying portfolios tend to have a higher purchase price relative to face value than non-paying accounts due to the higher
expectations for collections, as well as lower anticipated collection costs. As a result, in periods that we purchase a higher
percentage of fresh paper or paying portfolios, we expect that our purchase price as a percentage of face value would be higher
than would be in periods where a higher ratio of seasoned paper or non-paying portfolios were purchased.
During the years ended December 31, 2020, 2019 and 2018, we also invested $1.5 million, $30.9 million, and $8.0
million in REO assets, respectively.
Collections from Purchased Receivables by Channel and Geographic Location
We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal
collections; and collection agencies. The call center and digital collections channel consists of collections that result from our
call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our
internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from
third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to
supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts
purchased where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection
channels. The following table summarizes the total collections by collection channel and geographic area during the periods
presented (in thousands):
Year Ended December 31,
2020
2019
2018
United States:
Call center and digital collections
$
941,682 $
742,272 $
Legal collections
Collection agencies
Subtotal
Europe:
Call center and digital collections
Legal collections
Collection agencies
Subtotal
Other geographies(1):
Call center and digital collections
Legal collections
Collection agencies
Subtotal
658,272
548,374
17,317
573,510
13,750
563,038
10,799
1,528,942
1,316,109
1,223,963
245,762
165,249
142,935
553,946
—
—
28,960
28,960
257,317
198,903
178,998
635,218
25,620
3,541
46,440
75,601
291,540
161,556
182,081
635,177
86,407
7,908
14,165
108,480
Total collections from purchased receivables
$
2,111,848 $
2,026,928 $
1,967,620
__________________
(1)
In December 2018, we completed the sale of all our interest in Refinancia S.A. (“Refinancia”), which remains the servicer for the non-performing loans
we own in Colombia and Peru. As such, subsequent to December 2018, collections for these non-performing loans are classified as collection agency
collections instead of call center and digital collections. In August 2019, we completed the sale of our wholly-owned subsidiary Baycorp.
Gross collections from purchased receivables increased by $84.9 million, or 4.2%, to $2,111.8 million during the year
ended December 31, 2020, from $2,026.9 million during the year ended December 31, 2019. The increase of collections in the
United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our
collection capacity, and our continued effort in improving liquidation. Our consumer centric collection approach and our
capacity buildup are driving a higher proportion of call center and digital collections compared to legal collections in the United
32
Table of Contents
States. European collection decreased primarily due to the impacts of the COVID-19 pandemic. We anticipate a material
portion of the reduced collections in 2020 will be recovered in future years.
Gross collections from purchased receivables increased $59.3 million, or 3.0%, to $2,026.9 million during the year ended
December 31, 2019, from $1,967.6 million during the year ended December 31, 2018. The increase of collections in the United
States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection
capacity and our continued effort in improving liquidation. European collection improvement was partially offset by the
unfavorable impact of foreign currency translation, primarily from the strengthening of the U.S. dollar against the British Pound
during the year ended December 31, 2019 as compared to 2018.
Results of Operations
Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows for the
periods presented (in thousands, except percentages):
Revenues
Revenue from receivable portfolios
$ 1,374,717
91.5 % $ 1,269,288
90.8 % $ 1,167,132
85.7 %
2020
2019
2018
Year Ended December 31,
Changes in expected current and
future recoveries
Servicing revenue
Other revenues
Total revenues
(Allowances) allowance
reversals on receivable
portfolios, net
Total revenues, adjusted by net
allowances
7,246
115,118
4,319
0.5 %
—
— %
—
7.7 %
126,527
9.1 %
148,044
0.3 %
9,974
0.7 %
5,381
1,501,400
100.0 % 1,405,789
100.6 % 1,320,557
— %
10.9 %
0.4 %
97.0 %
(8,108)
(0.6) %
41,473
3.0 %
1,397,681
100.0 % 1,362,030
100.0 %
Operating expenses
Salaries and employee benefits
Cost of legal collections
General and administrative expenses
Other operating expenses
Collection agency commissions
Depreciation and amortization
Goodwill impairment
Total operating expenses
Income from operations
Other expense
Interest expense
378,176
239,071
149,113
108,944
49,754
42,780
—
967,838
533,562
25.2 %
376,365
26.9 %
369,064
15.9 %
202,670
14.5 %
205,204
9.9 %
148,256
10.6 %
158,352
7.3 %
108,433
7.8 %
134,934
3.3 %
2.8 %
— %
63,865
41,029
10,718
64.4 %
35.6 %
951,336
446,345
4.6 %
2.9 %
0.8 %
47,948
41,228
—
68.1 %
31.9 %
956,730
405,300
27.1 %
15.1 %
11.6 %
9.9 %
3.5 %
3.0 %
— %
70.2 %
29.8 %
(209,356)
(14.0) %
(217,771)
(15.6) %
(237,355)
(17.4) %
Loss on extinguishment of debt
(40,951)
(2.7) %
(8,989)
(357)
0.0 %
(18,343)
(0.6) %
(1.3) %
(2,693)
(8,764)
(0.2) %
(0.7) %
Other expense
Total other expense
Income before income taxes
Provision for income taxes
Net income
Net (income) loss attributable to
noncontrolling interest
Net income attributable to Encore
Capital Group, Inc. stockholders
(250,664)
(16.7) %
(245,103)
(17.5) %
(248,812)
(18.3) %
282,898
(70,374)
212,524
18.9 %
201,242
14.4 %
156,488
(4.7) %
(32,333)
(2.3) %
(46,752)
14.2 %
168,909
12.1 %
109,736
11.5 %
(3.4) %
8.1 %
(676)
(0.1) %
(1,040)
(0.1) %
6,150
0.4 %
$ 211,848
14.1 % $ 167,869
12.0 % $ 115,886
8.5 %
33
Table of Contents
Comparison of Results of Operations
Our Annual Report on Form 10-K for the year ended December 31, 2019 includes discussion and analysis of our financial
condition and results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018 in
Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues
Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities. Effective
January 1, 2020, we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off
the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after
purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries
for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as
“Investment in receivable portfolios, net” in our consolidated statements of financial condition. The discount rate is an effective
interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at
the time of purchase. Revenue generated by such activities primarily includes two components: (1) the accretion of the discount
on the negative allowance due to the passage of time, which is included in “Revenue from receivable portfolios” and (2)
changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected
cash recoveries and (b) the present value change of expected future recoveries, and is presented in our consolidated statements
of operations as “Changes in expected current and future recoveries.”
Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of
CECL. We did not establish a negative allowance for these pools as we elected the Transition Resource Group for Credit
Losses’ practical expedient to retain the integrity of these legacy pools. Similar to how we treated ZBA collections prior to the
adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue
from receivable portfolios in our consolidated statements of operations.
Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily
credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent
collections, trace services and litigation activities) to credit originators for non-performing loans.
Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our
investments in non-performing secured residential mortgage portfolios in Europe and LAAP. Other revenues also include gains
recognized on transfers of financial assets.
We have not adjusted prior period comparative information and will continue to disclose prior period financial
information in accordance with the previous accounting guidance. The following table summarizes revenues during the periods
presented (in thousands, except percentages):
34
Table of Contents
Revenue recognized from portfolio basis
$
1,318,306 $
1,185,681 $
132,625
ZBA revenue
Revenue from receivable portfolios
56,411
83,607
1,374,717
1,269,288
(27,196)
105,429
11.2 %
(32.5) %
8.3 %
Year Ended December 31,
2020
2019
$ Change
% Change
Changes in expected current period recoveries
Changes in expected future period recoveries
Changes in expected current and future recoveries
228,075
(220,829)
7,246
Servicing revenue
Other revenues
Total revenues
Allowance reversals on receivable portfolios, net(1)
Total revenues, adjusted by net allowances
115,118
4,319
126,527
9,974
$
1,501,400 $
1,405,789 $
(11,409)
(5,655)
95,611
(9.0) %
(56.7) %
6.8 %
(8,108)
$
1,397,681
__________________
(1) Amount includes $8.6 million of allowance reversals for zero-basis portfolios.
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating
results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar
relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S.
dollar relative to other foreign currencies has a favorable impact on our international revenues. Our international revenues were
favorably impacted by foreign currency translation, primarily from the weakening of the U.S. dollar, which decreased, based on
average exchange rates, against the British Pound by approximately 0.5%, during the year ended December 31, 2020 as
compared to the year ended December 31, 2019.
The increase in revenue recognized from portfolio basis during the year ended December 31, 2020 as compared to the
year ended December 31, 2019 was primarily due to higher expected total future cash flows resulting from a change in the
expected economic life of static pool groups based on a lifetime expected recovery model upon the adoption of CECL which
led to increased EIR, and increased expected total future cash flows resulting from a change in our accounting policy for court
costs. Under our new accounting policy, all future expected cash flows, including the expected total recoveries in our legal
channel, are included in the initial curve in the establishment of negative allowance, which in turn, increased the EIR.
As discussed above, ZBA revenue represents collections from our legacy ZBA pools. We expect our ZBA revenue to
continue to decline as we collect on these legacy pools. We do not expect to have new ZBA pools in the future.
Under CECL, changes in expected current period recoveries represent over and under-performance in the reporting
period. Collections during the year ended December 31, 2020 significantly outperformed the projected cash flows by
approximately $228.1 million. We believe the collection over-performance was largely driven by the reduced near-term
expected recoveries as a result of adjustments made to our projected cash flow forecast during the first quarter of 2020
associated with the COVID-19 pandemic. The over-performance was also a result of our sustained improvements in portfolio
collections driven by liquidation improvement initiatives.
While we now have additional information with respect to the impact on collections of the COVID-19 pandemic, the
future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and
spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime
recoveries during the year ended December 31, 2020, management considered historical and current collection performance,
uncertainty in economic forecasts in the geographies in which we operate, and believes that the operational disruption as a
result of the COVID-19 pandemic has, for the near term, been resolved through a combination of social distancing in the
workplace and working remotely. However, the macroeconomic driven consumer distress is still present and will likely
continue to impact our collections performance in the near future. As a result, we have updated our forecast, resulting in a
reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a provision for
credit loss adjustment of approximately $220.8 million during the year ended December 31, 2020. The circumstances around
this pandemic are evolving rapidly and will continue to impact our business and our estimation of expected recoveries in future
periods. We will continue to closely monitor the COVID-19 situation and update our assumptions accordingly.
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Table of Contents
The following tables summarize collections from purchased receivables, revenue, end of period receivable balance and
other related supplemental data, by year of purchase (in thousands, except percentages):
Year Ended December 31, 2020
As of December 31, 2020
Revenue from
Receivable
Portfolios
Changes in
Expected Current
and Future
Recoveries
Investment in
Receivable
Portfolios
Collections
Monthly EIR
United States:
ZBA
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Subtotal
Europe:
ZBA
2013
2014
2015
2016
2017
2018
2019
2020
Subtotal
Other geographies:
ZBA
2014 (1)
2015 (1)
2016
2017 (1)
2018
2019
2020
Subtotal
Total
$
51,730 $
25,497
27,740
64,367
47,628
64,133
116,452
193,328
308,302
416,315
213,450
1,528,942
184
93,203
84,255
55,102
51,584
87,549
78,846
80,502
22,721
553,946
51,865 $
22,389
24,934
59,837
34,687
31,837
57,473
105,124
157,303
262,751
118,448
926,648
183
86,148
69,170
42,970
42,806
59,801
59,211
54,377
15,908
430,574
4,362
3,837
4,688
2,633
7,303
5,892
245
—
28,960
2,111,848 $
4,363
1,703
2,649
1,827
3,850
2,963
140
—
17,495
1,374,717 $
$
— $
2,173
742
126
(4,364)
1,397
4,277
23,054
(2,980)
(10,325)
51,072
65,172
—
(8,540)
(2,488)
1,150
(6,275)
(12,788)
(36,973)
(4,804)
11,141
(59,577)
—
359
733
(52)
212
399
—
—
1,651
7,246 $
—
1,741
4,039
10,718
33,955
52,960
98,035
138,455
266,170
469,130
496,275
1,571,478
—
230,333
197,075
151,976
131,685
261,915
307,267
245,191
125,959
1,651,401
—
47,909
3,477
1,523
10,794
5,122
214
—
69,039
3,291,918
— %
88.6 %
42.0 %
40.5 %
6.7 %
3.9 %
3.9 %
5.2 %
3.8 %
3.8 %
3.7 %
4.4 %
— %
3.2 %
3.0 %
2.4 %
2.9 %
1.9 %
1.6 %
1.8 %
2.3 %
2.3 %
— %
102.5 %
96.7 %
7.2 %
6.2 %
3.7 %
4.6 %
— %
7.9 %
3.3 %
_______________________
(1) Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
36
Table of Contents
United States:
ZBA
2011
2012
2013
2014
2015
2016
2017
2018
2019
Subtotal
Europe:
ZBA
2013
2014
2015
2016
2017
2018
2019
Subtotal
Other geographies:
ZBA
2014
2015
2016
2017
2018
2019
Subtotal
Total
Year Ended December 31, 2019
As of December 31, 2019
Collections
Revenue from
Receivable
Portfolios
Net Reversal
(Portfolio
Allowance)
Unamortized
Balances
Monthly EIR
$
83,217 $
74,614 $
8,626 $
21,684
32,258
84,133
69,059
85,042
159,279
255,048
351,696
174,693
1,316,109
324
113,224
105,337
72,042
63,113
118,794
118,266
44,118
635,218
8,647
4,663
16,530
12,172
15,383
15,008
3,198
75,601
21,158
27,850
73,248
41,886
37,207
73,054
132,946
199,561
121,614
803,138
326
88,244
73,230
44,009
43,309
65,501
70,553
29,262
304
273
(150)
3,905
6,099
109
191
(4,955)
—
14,402
—
4,991
(372)
462
(529)
(7,190)
(18,332)
(470)
—
2,546
5,916
14,697
50,097
82,187
149,159
198,714
409,717
626,911
1,539,944
—
238,033
206,895
160,113
140,663
290,071
347,399
264,903
414,434
(21,440)
1,648,077
8,667
6,548
12,149
6,402
8,505
8,082
1,363
51,716
—
—
382
(399)
(98)
(955)
—
(1,070)
—
60,479
6,240
4,680
15,894
8,330
340
95,963
— %
85.5 %
35.5 %
33.4 %
6.0 %
3.1 %
3.2 %
4.5 %
3.3 %
3.3 %
4.1 %
— %
3.1 %
2.9 %
2.3 %
2.7 %
1.8 %
1.5 %
1.8 %
2.2 %
— %
103.0 %
22.0 %
5.3 %
6.2 %
3.8 %
4.6 %
7.0 %
3.1 %
$
2,026,928 $
1,269,288 $
(8,108) $
3,283,984
The decrease in servicing revenues during the year ended December 31, 2020 as compared to the year ended
December 31, 2019 was primarily attributable to the sale of Baycorp in August 2019. Through Baycorp, we earned servicing
revenues through August 2019. The decrease was also driven by the COVID-19 pandemic. The decrease during the year ended
December 31, 2020 as compared to the year ended December 31, 2019 was partially offset by the favorable impact of foreign
currency translation, which was primarily the result of the weakening of the U.S. dollar against the British Pound.
37
Table of Contents
Operating Expenses
The following table summarizes operating expenses during the periods presented (in thousands, except percentages):
Salaries and employee benefits
Cost of legal collections
General and administrative expenses
Other operating expenses
Collection agency commissions
Depreciation and amortization
Goodwill impairment
Total operating expenses
Year Ended December 31,
2020
2019
$ Change
$ Change
$
378,176 $
376,365 $
239,071
149,113
108,944
49,754
42,780
—
202,670
148,256
108,433
63,865
41,029
10,718
1,811
36,401
857
511
(14,111)
1,751
0.5 %
18.0 %
0.6 %
0.5 %
(22.1) %
4.3 %
(10,718)
(100.0) %
$
967,838 $
951,336 $
16,502
1.7 %
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating
results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar
relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the
U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. Our operating
expenses were unfavorably impacted by foreign currency translation, primarily by the weakening of the U.S. dollar against the
British Pound by approximately 0.5% for the year ended December 31, 2020 as compared to the year ended December 31,
2019.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
The increase in salaries and employee benefits during the year ended December 31, 2020 compared to the year ended
December 31, 2019 was primarily due to the following reasons:
•
•
•
•
Increase in stock-based compensation for the year ended December 31, 2020 due to adjustments to estimated vesting
of certain performance-based awards;
Increased employee headcount, see “Supplemental Performance Data - Headcount by Function by Geographic
Location” for details;
The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the
British Pound during the year ended December 31, 2020 compared to the year ended December 31, 2019;
Partially offset by reduced salaries and employee benefits due to the sale of Baycorp in August 2019.
38
Table of Contents
Cost of Legal Collections
Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of
litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal
legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Effective
January 1, 2020, we no longer capitalize upfront court costs and recognize a portion of court costs as expense based on a loss-
rate methodology, but rather, we expense all court costs as incurred. Cost of legal collections does not include internal legal
channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations.
The following table summarizes our cost of legal collections during the periods presented (in thousands, except
percentages):
Court costs
Legal collection fees
Total cost of legal collections
Year Ended December 31,
2020
2019
$ Change
% Change
$
$
148,596 $
94,165 $
54,431
90,475
108,505
(18,030)
239,071 $
202,670 $
36,401
57.8 %
(16.6) %
18.0 %
The increase in cost of legal collections during the year ended December 31, 2020 compared to the year ended
December 31, 2019 was primarily due to the following reasons:
•
•
No longer capitalizing upfront court costs but rather expensing all court costs as incurred;
Partially offset by lower court cost spending due to court closures in certain jurisdictions as a result of the COVID-19
pandemic.
General and Administrative Expenses
The increase in general and administrative expenses during the year ended December 31, 2020 compared to the year
ended December 31, 2019 was primarily due to the following reasons:
•
•
•
A charge of $15.0 million relating to our settlement with the CFPB;
Certain third-party costs of approximately $6.9 million incurred relating to various financing transactions completed in
September 2020;
Partially offset by reduced travel and facilities expenses, and consulting fees and lower general and administrative
expenses due to the sale of Baycorp in August 2019.
Other Operating Expenses
The increase in other operating expenses during the year ended December 31, 2020 compared to the year ended
December 31, 2019 was primarily due to the following reasons:
•
•
Increased postage and printing expenses primarily at our domestic operations;
Partially offset by lower collection expenses primarily due to the sale of Baycorp in August 2019.
Collection Agency Commissions
Collection agency commissions are commissions paid to third-party collection agencies. Collections through the
collections agencies channel are predominately in Europe and Latin America and vary from period to period depending on,
among other things, the number of accounts placed with an agency versus accounts collected internally. Commission rates vary
depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an
agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower
commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased
bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts.
The decrease in collections agency commissions during the year ended December 31, 2020 compared to the year ended
December 31, 2019 was primarily due to the decrease in agency collections in Europe and other geographies.
Depreciation and Amortization
The increase in depreciation and amortization expense during the year ended December 31, 2020 compared to the year
ended December 31, 2019 was primarily due to the following reasons:
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Table of Contents
•
•
Increased depreciation expense primarily incurred at our U.S. facilities;
Partially offset by the decrease due to the sale of Baycorp in August 2019.
Goodwill Impairment
In August 2019, we completed the sale of Baycorp. The transaction resulted in a goodwill impairment charge of $10.7
million and an additional loss on sale of $12.5 million during the year ended December 31, 2019.
Interest Expense
The following table summarizes our interest expense during the periods presented (in thousands, except percentages):
Stated interest on debt obligations
Amortization of loan fees and other loan costs
Amortization of debt discount
Total interest expense
Year Ended December 31,
$
2020
181,536 $
16,343
2019
193,003 $
11,455
11,477
13,313
$
209,356 $
217,771 $
$ Change
% Change
(11,467)
4,888
(1,836)
(8,415)
(5.9) %
42.7 %
(13.8) %
(3.9) %
In September 2020, we entered into various transactions, agreements and amendments related to our borrowings and
completed the implementation of our new global funding structure. In November and December 2020, we completed two
offerings of senior secured notes, partially redeemed our Cabot senior secured notes due in 2023 and fully redeemed our Cabot
floating rate notes due 2024. These refinancing transactions successfully reduced the interest rates on our outstanding
borrowings.
The decrease in interest expense during the year ended December 31, 2020 compared to the year ended December 31,
2019 was primarily due to the following reasons:
•
•
•
•
Lower average debt balances;
A decrease in LIBOR which resulted in decreased interest expense for the revolving credit facilities that reference
LIBOR;
Decreased interest rates as a result of various refinancing transactions;
Partially offset by increased amortization of loan fees and other loan costs as a result of higher capitalized debt
issuance costs.
Loss on Extinguishment of Debt
We presented certain refinancing charges such as make-whole provisions, call premiums, and write-offs of unamortized
debt issuance costs and debt discount as interest expense in prior periods. During the three months ended December 31, 2020,
we reclassed such costs as loss on extinguishment of debt as a single line item in our consolidated statements of operations.
Loss on extinguishment of debt was $41.0 million and $9.0 million during the years ended December 31, 2020 and 2019,
respectively. Refer to “Note 7: Borrowings” in the notes to our consolidated financial statements for details of our financing
activities.
Other Expense
Other expense or income consists primarily of foreign currency exchange gains or losses, interest income and gains or
losses recognized on certain transactions outside of our normal course of business. Other expense was $0.4 million during the
year ended December 31, 2020, which included a loss of $4.8 million as a result of the divestiture of our investment in Brazil.
This loss was partially offset by other income from fair value changes for currency exchange forward contracts that were not
designated as hedge instruments for accounting purposes.
Other expense was $18.3 million during the year ended December 31, 2019 and was primarily the result of a loss
recognized on the sale of Baycorp of approximately $12.5 million.
Provision for Income Taxes
During the years ended December 31, 2020 and 2019, we recorded income tax provisions for income from continuing
operations of $70.4 million and $32.3 million, respectively.
40
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The effective tax rates for the respective periods are shown below:
Federal provision
State provision
Foreign rate differential(1)
Change in valuation allowance
IRS settlement(2)
Tax effect of CFPB settlement fees(3)
Other
Effective rate
________________________
Year Ended December 31,
2020
2019
21.0 %
3.2 %
(0.5) %
0.9 %
— %
1.1 %
(0.8) %
24.9 %
21.0 %
0.2 %
(2.2) %
(0.5) %
(2.4) %
— %
— %
16.1 %
(1) Relates primarily to the lower tax rates on the income or loss attributable to international operations.
(2)
In 2019, includes tax benefit resulting from tax accounting method change.
(3) Non-deductible expense for tax purposes. Refer to “Note 12: Commitments and Contingencies” in the notes to our consolidated financial statements for
details of the CFPB settlement.
The effective tax rate for the year ended December 31, 2020 increased to 24.9% as compared to 16.1% for the year ended
December 31, 2019. The lower tax rate in 2019 was primarily related to benefits resulting from tax accounting method change
and exam resolutions with certain state taxing authorities.
Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent
earnings are lower than anticipated in countries that have lower statutory tax rates and higher than anticipated in countries that
have higher statutory tax rates.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles
(“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-
GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations.
Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business
that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates
comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies,
derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance,
competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our
financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or
calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted Earnings Per Share. Management uses non-GAAP adjusted net income and adjusted earnings per share, to
assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on
financial measures calculated in accordance with GAAP. Adjusted net income attributable to Encore excludes non-cash interest
and issuance cost amortization relating to our convertible and exchangeable notes, acquisition, integration and restructuring
related expenses, settlement fees and related administrative expenses, amortization of certain acquired intangible assets and
other charges or gains that are not indicative of ongoing operations.
The following table provides a reconciliation between net income and diluted earnings per share attributable to Encore
calculated in accordance with GAAP, to adjusted net income and adjusted earnings per share attributable to Encore,
respectively (in thousands, except per share data):
41
Table of Contents
GAAP net income attributable to Encore, as
reported
Adjustments:
CFPB settlement fees(1)
Convertible and exchangeable notes non-cash
interest and issuance cost amortization
Acquisition, integration and restructuring
related expenses(2)
Amortization of certain acquired intangible
assets(3)
Loss on sale of Baycorp(4)
Goodwill impairment(4)
Net gain on fair value adjustments to
contingent considerations(5)
Change in tax accounting method(6)
Expenses related to withdrawn Cabot IPO(7)
Loss on derivatives in connection with the
Cabot Transaction(8)
Adjustments attributable to noncontrolling
interest(9)
Year Ended December 31,
2020
2019
2018
$
Per Diluted
Share
$
Per Diluted
Share
$
Per Diluted
Share
$ 211,848 $
6.68 $ 167,869 $
5.33 $ 115,886 $
4.06
15,009
0.47
—
—
—
—
14,444
0.46
15,501
0.50
13,896
0.50
4,962
0.16
7,049
0.22
11,506
0.40
7,010
0.22
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,017
12,489
10,718
0.22
0.40
0.34
8,337
0.29
—
—
—
—
(2,300)
(0.07)
(5,664)
(0.20)
(7,825)
(0.25)
—
—
—
—
—
—
—
2,984
—
0.10
9,315
0.33
(5,022)
(0.18)
Income tax effect of the adjustments(10)
Adjusted net income attributable to Encore
(7,478)
(0.24)
(23,230)
(0.74)
(9,079)
(0.32)
$ 245,795 $
7.75 $ 187,288 $
5.95 $ 142,159 $
4.98
________________________
(1) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not
indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’
results.
(2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not
indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our
competitors’ results.
(3) We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers.
These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-
related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is the result of pre-acquisition
activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting
period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income attributable to Encore and adjusted
income per share.
(4) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31,
2019. We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses
enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(5) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of
debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to
the Contingent Consideration section of “Note 2: Fair Value Measurements” in the notes to our consolidated financial statements for further details.
(6) Amount represents the benefit from the tax accounting method change related to revenue reporting. We adjust for certain discrete tax items that are not
indicative of our ongoing operations.
(7) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. We adjust for this amount because we believe
these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated
future periods, and our competitors’ results.
(8) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the purchase of all of the outstanding
equity of CCM not owned by Encore (the “Cabot Transaction”). We adjust for this amount because we believe the loss is not indicative of ongoing
operations; therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(9) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the
non-GAAP adjustments that are attributable to noncontrolling interest.
(10) Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the
jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing
operations. We recognized approximately $17.5 million, or $0.55 per diluted share, in tax benefit as a result of the sale of Baycorp, which is included in
this income tax adjustment during the year ended December 31, 2019.
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Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations,
interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration
and restructuring related expenses, settlement fees and related administrative expenses and other charges or gains that are not
indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented
is as follows (in thousands):
GAAP net income, as reported
Adjustments:
Interest expense
Loss on extinguishment of debt
Interest income
Provision for income taxes
Depreciation and amortization
CFPB settlement fees(1)
Stock-based compensation expense
Acquisition, integration and restructuring related expenses(2)
Loss on sale of Baycorp(3)
Goodwill impairment(3)
Net gain on fair value adjustments to contingent
considerations(4)
Loss on derivative in connection with the Cabot
Transaction(5)
Expenses related to withdrawn Cabot IPO(6)
Year Ended December 31,
2020
2019
2018
$
212,524 $
168,909 $
109,736
209,356
40,951
217,771
8,989
(2,397)
(3,693)
70,374
42,780
15,009
16,560
4,962
—
—
—
—
—
32,333
41,029
—
12,557
7,049
12,489
10,718
—
—
237,355
2,693
(3,345)
46,752
41,228
—
12,980
7,523
—
—
9,315
2,984
461,557
759,014
(2,300)
(5,664)
Adjusted EBITDA
Collections applied to principal balance(7)
________________________
$
$
610,119 $
740,350 $
505,851 $
765,748 $
(1) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not
indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’
results.
(2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not
indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our
competitors’ results.
(3) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31,
2019. We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses
enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(4) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of
debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to
the Contingent Consideration section of “Note 2: Fair Value Measurements” in the notes to our consolidated financial statements for further details.
(5) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for
this amount because we believe the loss is not indicative of ongoing operations; therefore, adjusting for this loss enhances comparability to prior
periods, anticipated future periods, and our competitors’ results.
(6) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. We adjust for this amount because we believe
these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated
future periods, and our competitors’ results.
(7) For periods prior to January 1, 2020, amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable
portfolios and (c) allowance charges or allowance reversals on receivable portfolios. For periods subsequent to January 1, 2020 amount represents (a)
gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries. For
consistency with the Company debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also
includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as
such amounts were immaterial.
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Table of Contents
Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of
approximate costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our
portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out
stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, acquisition,
integration and restructuring related operating expenses, settlement fees and related administrative expenses and other charges
or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and
recovery business for the periods presented are as follows (in thousands):
GAAP total operating expenses, as reported
$
967,838 $
951,336 $
956,730
Year Ended December 31,
2020
2019
2018
Adjustments:
Operating expenses related to non-portfolio purchasing and
recovery business(1)
CFPB settlement fees(2)
Stock-based compensation expense
Acquisition, integration and restructuring related operating
expenses(3)
Goodwill impairment(4)
Net gain on fair value adjustments to contingent
considerations(5)
Expenses related to withdrawn Cabot IPO(6)
Adjusted operating expenses related to portfolio purchasing and
recovery business
________________________
(182,930)
(173,190)
(193,715)
(15,009)
(16,560)
(154)
—
—
—
—
—
(12,557)
(12,980)
(7,049)
(10,718)
2,300
—
(7,523)
—
5,664
(2,984)
$
753,185 $
750,122 $
745,192
(1) Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily
engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business.
(2) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not
indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’
results.
(3) Amount represents acquisition, integration and restructuring related operating expenses. We adjust for this amount because we believe these expenses
are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and
our competitors’ results.
(4) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million that is included in operating expenses during the year ended December
31, 2019. We believe the goodwill impairment charge is not indicative of ongoing operations, therefore, adjusting for the expense enhances
comparability to prior periods, anticipated future periods, and our competitors’ results.
(5) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of
debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to
the Contingent Consideration section of “Note 2: Fair Value Measurements” in the notes to our consolidated financial statements for further details.
(6) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. We adjust for this amount because we believe
these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated
future periods, and our competitors’ results.
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Table of Contents
Cost per Dollar Collected
We utilize cost per dollar collected (or “cost-to-collect”) in order to facilitate a comparison of approximate costs to cash
collections from purchased receivables for our portfolio purchasing and recovery business. Cost-to-collect is calculated by
dividing adjusted operating expenses by collections from purchased receivables. The calculation of adjusted operating expenses
is illustrated in detail above. The following table summarizes our overall cost per dollar collected by geographic location during
the periods presented:
United States
Europe
Other geographies
Overall cost per dollar collected
Year Ended December 31,
2020
2019
37.4 %
29.9 %
55.9 %
35.7 %
40.3 %
28.2 %
54.3 %
37.0 %
As discussed in the “Change in Accounting Principle” section in “Note 1: Ownership, Description of Business, and
Summary of Significant Accounting Policies” of the notes to the consolidated financial statements, effective January 1, 2020,
we expense all court costs as incurred and no longer capitalize such costs as Deferred Court Costs based on a loss-rate
methodology. This change in accounting principle increased the cost-to-collect metric as compared to prior periods because the
court costs expense recognized in prior periods only represented costs we did not expect to recover. The change in accounting
principle has no impact on the amount of court cost payments incurred.
Despite the increase in expense due to the change in accounting principle discussed above, cost-to-collect decreased 130
basis points to 35.7% for the year ended December 31, 2020 from 37.0% during the prior year.
The decrease in overall cost-to-collect was driven by improved cost-to-collect in the United States, which was due to a
combination of (1) continued improvement in operational efficiencies in the collection process, (2) a large reduction in legal
channel spending due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal channel
spending has gradually increased in the third and fourth quarters as compared to the previous quarters but is still lower than
historical levels and (3) collection mix shifting towards non-legal collection, which has a lower cost-to-collect. Collections from
other geographies continue to decline as we continue to focus on the U.S. and European markets. Cost-to-collect in LAAP is
expected to stay at an elevated level and will continue to fluctuate over time.
Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on
seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory
and legislative environment.
Supplemental Performance Data
The tables included in this supplemental performance data section include detail for purchases, collections and ERC by
year of purchase.
Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made
to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to
ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections
both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between
types of portfolio and geographic location. For example, in the U.K., due to the higher concentration of payment plans, as
compared to the U.S. and other locations in Europe, we expect to receive streams of collections over longer periods of time. As
a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable
indicator of future results in other locations or for other types of portfolio.
The supplemental performance data presented in this section is impacted by foreign currency translation, which represents
the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar
reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable
reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other
foreign currencies has a favorable impact on our international purchases, collections, and ERC.
We utilize proprietary forecasting models to continuously evaluate the economic life of each pool.
45
Table of Contents
Cumulative Collections from Purchased Receivables to Purchase Price Multiple
The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples):
Year of
Purchase
United States:
<2011
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Subtotal
Europe:
2013
2014
2015
2016
2017
2018
2019
2020
Subtotal
Other geographies:
2012
2013
2014
2015
2016
2017
2018
2019
2020
Subtotal
Total
Purchase
Price(1)
<2011
2011
2012
2013
Cumulative Collections through December 31, 2020
2016
2017
2015
2014
2018
2019
2020
Total(2)
Multiple(3)
$ 1,760,989 $ 3,222,155 $ 637,415 $ 458,336 $ 328,076 $ 236,557 $ 180,622 $ 129,676 $
383,794
548,808
551,895
517,685
499,257
553,335
528,384
630,775
677,357
540,264
7,192,543
—
—
—
—
—
—
—
—
—
—
3,222,155
619,079
623,129
419,941
258,218
461,571
433,302
273,354
116,899
3,205,493
—
—
—
—
—
—
—
—
—
123,596
—
—
—
—
—
—
—
—
—
761,011
—
—
—
—
—
—
—
—
—
301,949
187,721
—
—
—
—
—
—
—
—
948,006
226,521
350,134
230,051
—
—
—
—
—
—
—
1,134,782
155,180
259,252
397,646
144,178
—
—
—
—
—
—
1,192,813
112,906
176,914
298,068
307,814
105,610
—
—
—
—
—
1,181,934
77,257
113,067
203,386
216,357
231,102
110,875
—
—
—
—
1,081,720
99,169 $
56,287
74,507
147,503
142,147
186,391
283,035
111,902
—
—
—
1,100,941
80,397 $
41,148
48,832
107,399
94,929
125,673
234,690
315,853
175,042
—
—
1,223,963
65,855 $
33,445
37,327
84,665
69,059
85,042
159,279
255,048
351,696
174,693
—
1,316,109
51,481 $ 5,489,739
1,153,909
25,620
1,275,551
27,797
1,533,154
64,436
1,022,112
47,628
797,951
64,133
904,331
116,452
876,131
193,328
835,040
308,302
591,008
416,315
213,450
213,450
14,692,376
1,528,942
—
—
—
—
—
—
—
—
—
134,259
—
—
—
—
—
—
—
134,259
249,307
135,549
—
—
—
—
—
—
384,856
212,129
198,127
65,870
—
—
—
—
—
476,126
165,610
156,665
127,084
44,641
—
—
—
—
494,000
146,993
137,806
103,823
97,587
68,111
—
—
—
554,320
132,663
129,033
88,065
83,107
152,926
49,383
—
—
635,177
113,228
105,337
72,277
63,198
118,794
118,266
44,118
—
635,218
93,203
84,255
55,261
51,609
87,549
78,846
80,502
1,247,392
946,772
512,380
340,142
427,380
246,495
124,620
22,721
553,946
22,721
3,867,902
6,721
29,568
86,989
83,198
64,450
49,670
26,371
2,668
—
349,635
9,816
47,594
72,693
170,433
119,245
61,232
33,810
3,443
—
518,266
$ 10,747,671 $ 3,222,155 $ 761,011 $ 948,006 $ 1,279,506 $ 1,607,497 $ 1,700,725 $ 1,685,604 $ 1,767,644 $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 19,078,544
542
4,606
18,403
57,064
29,269
—
—
—
—
109,884
551
3,339
9,813
43,499
39,710
15,471
—
—
—
112,383
422
2,468
7,991
32,622
28,992
23,075
12,910
—
—
108,480
3,848
6,617
—
—
—
—
—
—
—
10,465
2,561
17,615
9,652
—
—
—
—
—
—
29,828
1,208
10,334
16,062
15,061
—
—
—
—
—
42,665
390
1,573
6,472
17,499
16,078
15,383
15,008
3,198
—
75,601
294
1,042
4,300
4,688
5,196
7,303
5,892
245
—
28,960
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3.1
3.0
2.3
2.8
2.0
1.6
1.6
1.7
1.3
0.9
0.4
2.0
2.0
1.5
1.2
1.3
0.9
0.6
0.5
0.2
1.2
1.5
1.6
0.8
2.0
1.9
1.2
1.3
1.3
—
1.5
1.8
________________________
(1) Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the
respective purchase agreement.
(2) Cumulative collections from inception through December 31, 2020, excluding collections on behalf of others.
(3) Cumulative Collections Multiple (“Multiple”) through December 31, 2020 refers to collections as a multiple of purchase price.
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Total Estimated Collections from Purchased Receivables to Purchase Price Multiple
The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross
collections for purchased receivables, by year of purchase (in thousands, except multiples):
Purchase Price(1)
Historical
Collections(2)
Estimated
Remaining
Collections
Total Estimated
Gross Collections
Total Estimated Gross
Collections to
Purchase Price
United States:
<2011
2011
2012
2013(3)
2014(3)
2015
2016
2017
2018
2019
2020
Subtotal
Europe:
2013(3)
2014(3)
2015(3)
2016
2017
2018
2019
2020
Subtotal
Other geographies:
2012
2013
2014
2015
2016
2017
2018
2019
2020
Subtotal
Total
$
$
1,760,989 $
383,794
548,808
551,895
517,685
499,257
553,335
528,384
630,775
677,357
540,264
7,192,543
5,489,739 $
1,153,909
1,275,551
1,533,154
1,022,112
797,951
904,331
876,131
835,040
591,008
213,450
14,692,376
619,079
623,129
419,941
258,218
461,571
433,302
273,354
116,899
3,205,493
6,721
29,568
86,989
83,198
1,247,392
946,772
512,380
340,142
427,380
246,495
124,620
22,721
3,867,902
9,816
47,594
72,693
170,433
115,101 $
54,675
61,317
172,934
110,916
120,743
223,731
366,098
562,107
995,808
1,110,044
3,893,474
914,652
678,545
437,102
337,273
583,441
637,914
530,179
312,508
4,431,614
162
1,106
54,635
17,864
64,450
49,670
26,371
2,668
—
349,635
10,747,671 $
119,245
61,232
33,810
3,443
—
518,266
19,078,544 $
5,899
30,289
9,920
421
—
120,296
8,445,384 $
5,604,840
1,208,584
1,336,868
1,706,088
1,133,028
918,694
1,128,062
1,242,229
1,397,147
1,586,816
1,323,494
18,585,850
2,162,044
1,625,317
949,482
677,415
1,010,821
884,409
654,799
335,229
8,299,516
9,978
48,700
127,328
188,297
125,144
91,521
43,730
3,864
—
638,562
27,523,928
3.2
3.1
2.4
3.1
2.2
1.8
2.0
2.4
2.2
2.3
2.4
2.6
3.5
2.6
2.3
2.6
2.2
2.0
2.4
2.9
2.6
1.5
1.6
1.5
2.3
1.9
1.8
1.7
1.4
—
1.8
2.6
________________________
(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent
ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2) Cumulative collections from inception through December 31, 2020, excluding collections on behalf of others.
(3)
Includes portfolios acquired in connection with certain business combinations.
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Table of Contents
Estimated Remaining Gross Collections from Purchased Receivables by Year of Purchase
The following table summarizes our estimated remaining gross collections for purchased receivables by year of purchase
(in thousands):
2021
2022
2023
2024
2025
2026
2027
2028
2029
>2029
Total(2)
Estimated Remaining Gross Collections by Year of Purchase(1)
$
35,925 $
26,180 $
18,179 $ 12,553 $ 8,564 $ 5,800 $ 3,848 $ 2,384 $ 1,258 $
410 $ 115,101
United States:
<2011
2011
2012
2013(3)
2014(3)
2015
2016
2017
2018
2019
2020
16,599
18,501
49,612
33,329
37,280
73,054
120,287
191,409
349,045
298,297
Subtotal
1,223,338
Europe:
2013(3)
2014(3)
2015(3)
2016
2017
2018
2019
2020
100,145
85,220
55,714
58,524
87,521
87,004
83,648
43,738
11,808
13,009
36,577
23,568
26,255
46,967
81,528
131,151
213,131
300,371
910,545
97,594
77,011
50,404
54,097
82,023
84,426
77,209
46,970
8,183
9,137
5,723
6,414
4,033
4,515
25,902
18,368
13,032
16,301
11,291
18,062
12,277
7,979
8,197
2,847
3,183
9,246
5,648
5,660
31,826
22,079
15,355
10,517
2,016
2,250
6,562
4,001
3,990
7,353
51,712
34,557
23,705
16,527
11,581
84,377
53,132
34,927
23,047
15,214
1,429
1,596
4,659
2,838
2,819
5,174
8,167
9,950
1,017
1,136
3,309
2,015
1,996
3,648
1,020
1,576
5,667
3,946
4,207
7,758
5,759
12,275
6,620
12,280
134,793
91,889
62,683
43,723
31,172
22,231
15,498
31,643
54,675
61,317
172,934
110,916
120,743
223,731
366,098
562,107
995,808
175,189
106,095
71,412
48,451
34,062
24,310
17,327
34,530
1,110,044
573,661
374,378
254,402
174,649
122,049
85,557
59,583
115,312
3,893,474
91,655
85,731
78,218
69,395
62,179
56,149
50,925
222,661
72,046
65,329
58,565
49,705
44,325
38,965
34,983
152,396
46,506
41,560
37,585
33,159
28,535
24,972
22,833
95,834
40,481
34,949
29,138
24,020
19,938
16,963
14,403
44,760
70,536
60,050
50,134
42,541
36,495
30,357
26,206
97,578
76,090
66,778
58,662
48,514
41,395
35,900
29,928
109,217
65,517
55,199
45,684
37,710
31,496
26,896
22,616
84,204
42,865
34,312
27,479
24,542
19,572
16,263
13,420
43,347
914,652
678,545
437,102
337,273
583,441
637,914
530,179
312,508
Subtotal
601,514
569,734
505,696
443,908
385,465
329,586
283,935
246,465
215,314
849,997
4,431,614
Other geographies:
2012
2013
2014
2015
2016
2017
2018
2019
2020
Subtotal
Portfolio
ERC
REO
ERC(4)
Total
113
555
10,548
3,500
3,189
7,820
3,766
179
—
49
357
8,488
2,991
1,615
5,502
2,350
106
—
—
194
7,630
2,763
573
4,061
1,676
72
—
—
—
6,531
1,942
258
2,302
963
54
—
—
—
4,934
1,284
169
2,042
518
10
—
—
—
—
—
—
—
—
—
2,899
1,649
1,502
1,502
949
95
1,530
338
—
—
831
—
878
222
—
—
719
—
773
87
—
—
601
—
773
—
—
—
—
—
8,952
2,284
—
4,608
—
—
—
162
1,106
54,635
17,864
5,899
30,289
9,920
421
—
29,670
21,458
16,969
12,050
8,957
5,811
3,580
3,081
2,876
15,844
120,296
1,854,522
1,501,737
1,096,326
830,336
648,824
510,046
409,564
335,103
277,773
981,153
8,445,384
27,115
26,403
17,203
7,791
1,866
64
6
78
74
—
80,600
$ 1,881,637 $ 1,528,140 $ 1,113,529 $ 838,127 $ 650,690 $ 510,110 $ 409,570 $ 335,181 $ 277,847 $ 981,153 $ 8,525,984
________________________
(1) ERC for Zero Basis Portfolios can extend beyond our collection forecasts. As of December 31, 2020, ERC for Zero Basis Portfolios includes
approximately $115.1 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and
other geographies was immaterial. ERC also includes approximately $84.0 million from cost recovery portfolios, primarily in other geographies.
(2) Represents the expected remaining gross cash collections on purchased portfolios over a 180-month period. As of December 31, 2020, ERC for
purchased receivables for 84-month and 120-month periods were:
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Table of Contents
United States
Europe
Other geographies
Portfolio ERC
REO ERC
Total ERC
84-Month ERC
120-Month ERC
$
$
$
$
3,633,022 $
3,119,838
98,495
6,851,355 $
80,448 $
6,931,803 $
3,819,461
3,769,186
107,248
7,695,895
80,600
7,776,495
(3) Includes portfolios acquired in connection with certain business combinations.
(4) Real estate-owned assets ERC includes approximately $78.7 million and $1.9 million of estimated future cash flows for Europe and Other Geographies,
respectively.
Estimated Future Collections Applied to Principal
As of December 31, 2020, we had $3.3 billion in investment in receivable portfolios. The estimated future collections
applied to the investment in receivable portfolios net balance is as follows (in thousands):
Years Ending December 31,
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
United States
Europe
Other
Geographies
Total
Amortization
$
474,872 $
168,875 $
18,437 $
397,791
237,719
146,742
97,357
65,289
45,463
32,109
22,570
15,961
11,467
8,479
6,725
5,685
3,249
—
188,289
173,000
155,394
136,759
115,726
99,366
86,979
78,265
70,738
67,531
67,055
70,895
77,893
88,833
5,803
14,561
9,525
6,886
5,392
3,198
1,822
1,577
1,502
1,502
1,502
1,502
1,502
131
—
—
662,184
600,641
420,244
309,022
239,508
184,213
146,651
120,665
102,337
88,201
80,500
77,036
79,122
83,709
92,082
5,803
Total
$
1,571,478 $
1,651,401 $
69,039 $
3,291,918
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Table of Contents
Headcount by Function by Geographic Location
The following table summarizes our headcount by function and by geographic location:
Headcount as of December 31,
2020
2019
2018
United States:
General & Administrative
Account Manager
Subtotal
Europe:
General & Administrative
Account Manager
Subtotal
Other Geographies(1):
General & Administrative
Account Manager
Subtotal
Total
________________________
1,167
389
1,556
997
2,483
3,480
1,227
1,462
2,689
7,725
1,106
418
1,524
998
2,085
3,083
1,173
1,475
2,648
7,255
1,060
504
1,564
1,036
2,037
3,073
1,345
1,884
3,229
7,866
(1) Headcount for other geographies includes employees in India and Costa Rica that service accounts originated in the United States. Headcount as of
December 31, 2018 includes 191 general and administrative and 361 account manager Baycorp employees.
Purchases by Quarter
The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices (in
thousands):
Quarter
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
# of
Accounts
Face Value
Purchase
Price
973 $
1,799,804 $
1,031
706
766
854
778
1,255
803
943
754
735
558
2,870,456
1,559,241
2,272,113
1,732,977
2,307,711
5,313,092
2,241,628
1,703,022
1,305,875
1,782,733
1,036,332
276,762
359,580
248,691
246,865
262,335
242,697
259,910
234,916
214,113
147,939
170,131
127,689
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Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activity during the periods presented (in thousands):
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash (used in) provided by financing activities
Operating Cash Flows
Year Ended December 31,
2020
2019
2018
$
312,864 $
82,826
(403,200)
244,733 $
(202,333)
(19,770)
186,791
(397,516)
166,377
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than
investing and financing activities.
Net cash provided by operating activities was $312.9 million, $244.7 million, and $186.8 million during the years ended
December 31, 2020, 2019, and 2018, respectively. Operating cash flows are derived by adjusting net income for non-cash
operating items such as depreciation and amortization, changes in expected recoveries, allowance charges, stock-based
compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and
payment of cash associated with transactions and when they are recognized in results of operations.
Investing Cash Flows
Net cash provided by investing activities was $82.8 million during year ended December 31, 2010, net cash used in
investing activities was $202.3 million and $397.5 million during the years ended December 31, 2019 and 2018, respectively.
Cash provided by or used in investing activities is primarily affected by receivable portfolio purchases offset by collection
proceeds applied to the principal of our receivable portfolios. Receivable portfolio purchases were $644.0 million, $1,035.1
million, and $1,131.1 million during the years ended December 31, 2020, 2019, and 2018, respectively. Collection proceeds
applied to the principal of our receivable portfolios were $737.1 million, $757.6 million, and $809.7 million during the years
ended December 31, 2020, 2019, and 2018, respectively.
Financing Cash Flows
Net cash used in financing activities was $403.2 million and $19.8 million during the years ended December 2020 and
2019, respectively, net cash provided by financing activities was $166.4 million during the year ended December 31, 2018.
Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings,
offset by repayments of amounts outstanding under our credit facilities and repayments of various notes. Borrowings under our
credit facilities were $1,820.6 million, $603.6 million and $942.2 million during the years ended December 31, 2020, 2019, and
2018, respectively. Repayments of amounts outstanding under our credit facilities were $2,290.8 million, $586.4 million and
$571.1 million during the years ended December 31, 2020, 2019, and 2018, respectively. Proceeds from the issuance of senior
secured notes were $1,313.4 million and $454.6 million during the years ended December 31, 2020 and 2019, respectively.
Repayments of senior secured notes were $1,033.8 million, $470.8 million and $91.6 million during the years ended
December 31, 2020, 2019, and 2018, respectively.
Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our
investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets,
we consider additional financings to fund our operations and acquisitions. From time to time, we may repurchase outstanding
debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements have included the purchase of
receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the
payment of income taxes.
Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in
receivable portfolios, and our bank borrowings.
We are in material compliance with all covenants under our financing arrangements. See “Note 7: Borrowings” in the
notes to our consolidated financial statements for a further discussion of our debt.
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Table of Contents
In August 2018, we established an at-the-market equity offering program (the “ATM Program”) pursuant to which we
may issue and sell shares of Encore’s common stock having an aggregate offering price of $50.0 million. During the year ended
December 31, 2020, we did not issue any shares under our ATM Program. We have issued a total of 13,600 shares under our
ATM Program, generating proceeds of approximately $0.54 million.
We have no obligation to sell any of such shares under our ATM Program. Actual sales will depend on a variety of factors
to be determined by the Company from time to time, including, among others, market conditions, the trading price of our
common stock, our determination of the appropriate sources of funding for the Company, and potential uses of funding
available to us. We intend to use the net proceeds from the offering of such shares, if any, for general corporate purposes, which
could include repayments of our credit facilities from time to time.
Our cash and cash equivalents as of December 31, 2020 consisted of $39.4 million held by U.S.-based entities and $149.8
million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and
may be subject to material tax effects if repatriated. However, we believe that our sources of cash and liquidity are sufficient to
meet our business needs in the United States and do not expect that we will need to repatriate the funds.
Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients.
The balance of cash held for clients was $20.3 million and $25.0 million as of December 31, 2020 and 2019, respectively.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of
the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in our Risk Factors.
However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our
expectation of continued positive cash flows from operations, cash collections from our investment in receivable portfolios, our
cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will
depend on our acquisitions of portfolios and businesses.
Future Contractual Cash Obligations
The following table summarizes our future contractual cash obligations as of December 31, 2020 (in thousands):
Contractual Obligations
Principal payments on debt
Estimated interest payments(1)
Finance leases
Operating leases
Purchase commitments on receivable
portfolios
Total contractual cash obligations(2)
________________________
Payment Due By Period
Total
Less
Than
1 Year
1 – 3 Years
3 – 5 Years
More
Than
5 Years
$ 3,365,205 $
208,132 $
720,392 $ 1,520,452 $
916,229
649,961
8,792
113,485
141,033
3,674
19,440
274,117
4,877
30,183
174,693
241
26,086
60,118
—
37,776
157,448
$ 4,294,891 $
150,713
—
522,992 $ 1,036,304 $ 1,721,472 $ 1,014,123
6,735
—
(1) Estimated interest payments are calculated based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as
of December 31, 2020 for variable rate debt, timing of scheduled payments and the term of the debt obligations.
(2) We had approximately $6.9 million of liabilities and accrued interests related to uncertain tax positions as of December 31, 2020. We are unable to
reasonably estimate the timing of the cash settlement with the tax authorities due to uncertainties related to these tax matters and, as a result, these
obligations are not included in the table. See “Note 10: Income Taxes” to our consolidated financial statements for additional information on our
uncertain tax positions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
We prepare our financial statements, in conformity with GAAP, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. “Note 1:
Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated
financial statements describes the significant accounting policies and methods used in the preparation of our consolidated
financial statements.
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We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances,
and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates and such differences may
be material. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further
below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.
Investment in Receivable Portfolios and Related Revenue. Effective January 1, 2020, our investment in receivable
portfolios is accounted for under CECL.
Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk
characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location.
Our static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. We further
group these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool
unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if
expected future cash flows change.
Revenue is recognized for each static pool over the economic life of the pool. We make significant assumptions in
determining the economic life of a pool, including the reasonable and supportable economic forecast period based on asset type
and geography, which considers the availability of forward-looking scenarios and their respective time horizons. In general, we
forecast recoveries over one or two years prior to reverting to historical averages at an estimate-level over the remaining life
using various methodologies depending on the asset type and geography. The speed at which forecasts revert varies based on
the spread between the forecast period and historical data. In addition, estimated recoveries include a qualitative component,
which generally reflects management’s assessment of macroeconomic environment and business initiatives. We continue to
evaluate the reasonable economic life of a pool and reversion method annually. Revenue primarily includes two components:
(1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected cash flows,
which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present
value change of expected future recoveries.
We measure expected future recoveries based on historical experience, current conditions, and reasonable and supportable
forecasts. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal
factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may
have an impact on our collections include macroeconomic conditions, new laws or regulations, and new interpretations of
existing laws or regulations. See “Note 4: Investment in Receivable Portfolios, Net” for further discussion of investment in
receivable portfolios.
Valuation of Goodwill and Other Intangible Assets. Business combinations typically result in the recording of goodwill
and other intangible assets. The excess of the purchase price over the fair value assigned to the tangible and identifiable
intangible assets, liabilities assumed, and noncontrolling interest in the acquiree is recorded as goodwill.
Goodwill is tested annually for impairment and in interim periods if events or changes in circumstances indicate that the
assets may be impaired. Our judgments regarding the existence of impairment indicators and future cash flows related to
goodwill may be based on economic environment, business climate, market capitalization, operating performance, competition,
and other factors. Significant judgments are required to estimate the fair value of reporting units including estimating future
cash flows, determining appropriate discount rates, growth rates, comparable guideline companies and other assumptions.
Future business conditions and/or activities could differ materially from the projections made by management, which in turn,
could result in the need for impairment charges. We will perform additional impairment testing if events occur or circumstances
change indicating that the carrying amounts may be impaired.
The determination of the recorded value of intangible assets acquired in a business combination requires management to
make estimates and assumptions that affect our consolidated financial statements. Valuation techniques consistent with the
market approach, income approach and/or cost approach are used to measure fair value. An estimate of fair value can be
affected by many assumptions that require significant judgment.
Income Taxes. We use the asset and liability method of accounting for income taxes. When we prepare the consolidated
financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires
us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items
for tax and accounting purposes. Deferred income taxes are recognized based on the differences between the financial statement
and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected
to reverse. We then assess the likelihood that our deferred tax assets will be realized. In completing this evaluation, we consider
all available positive and negative evidence. Such evidence includes historical earnings, taxable income in prior carryback
year(s) if permitted under the tax law, projections of future pretax book income, the time period over which our temporary
differences will reverse, and the implementation of feasible and prudent tax planning strategies. Deferred tax assets are reduced
53
Table of Contents
by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded
deferred tax assets will not be realized in future periods. When we establish a valuation allowance or increase this allowance in
an accounting period, we record a corresponding tax expense in our statement of operations. When we reduce our valuation
allowance in an accounting period, we record a corresponding tax benefit in our statement of operations. We include interest
and penalties related to income taxes within our provision for income taxes. See “Note 10: Income Taxes” to our consolidated
financial statements for further discussion of income taxes.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements and the impact of those pronouncements, if any, on our
consolidated financial statements is provided in this Annual Report in “Note 1: Ownership, Description of Business, and
Summary of Significant Accounting Policies” to our consolidated financial statements.
54
Table of Contents
Item 7A—Quantitative and Qualitative Disclosures About Market Risk
We are exposed to economic risks from foreign currency exchange rates and interest rates. A portion of these risks is
hedged, but the risks may affect our financial statements.
Foreign Currency Exchange Rates
We have operations in foreign countries, which expose us to foreign currency exchange rate fluctuations due to
transactions denominated in foreign currencies. Our primary foreign currency exposures relate to the British Pound, Euro, and
Indian Rupee. We continuously evaluate and manage our foreign currency risk through the use of derivative financial
instruments, including foreign currency forward contracts with financial counterparties where practicable. Such derivative
instruments are viewed as risk management tools and are not used for speculative or trading purposes.
Cross-currency swap agreements are used to effectively convert fixed-rate Euro-denominated borrowings, including the
principal amount of the underlying debt and periodic interest payments, to fixed-rate U.S. dollar denominated debt and are
accounted for as cash flow hedges.
As of December 31, 2020, we had €350.0 million (approximately $426.8 million based on an exchange rate of $1.00 to
€0.82, the exchange rate as of December 31, 2020) of outstanding Euro-denominated borrowings in our U.S. dollar functional
currency entity. We have four cross-currency swap agreements with a total notional amount of €350.0 million that effectively
convert interest and principal payments on this debt from Euro to U.S. dollar. The cross-currency derivative instruments have
maturities of October 2023. As of December 31, 2020, the cross-currency swap agreements had a fair value asset position of
$11.6 million. These swaps eliminate the foreign currency risk associated with our Euro-denominated borrowings.
Interest Rates
We have variable interest-bearing borrowings under our credit facilities that subject us to interest rate risk. We have, from
time to time, utilized derivative financial instruments, including interest rate swap contracts and interest rate cap contracts with
financial counterparties to manage our interest rate risk. As of December 31, 2020, we had two interest rate swap agreements
outstanding with a total notional amount of $196.4 million. As of December 31, 2020, we held two interest rate cap contracts
with a total notional amount of approximately $965.8 million used to manage risk related to interest rate fluctuations. Both the
interest rate swap and interest rate cap instruments are designated as cash flow hedges and are accounted for using hedge
accounting.
Our variable interest-bearing debt that is not hedged by derivative financial instruments is subject to the risk of interest
rate fluctuations. Significant increases in future interest rates on our variable rate debt could lead to a material decrease in future
earnings assuming all other factors remain constant. The rates used in our variable interest-bearing debt are based LIBOR, or
other index rates, which in certain cases are subject to a floor. A hypothetical 50 basis points increase in interest rates as of
December 31, 2020 related to variable rate debt agreements not hedged by derivatives would have a $3.1 million negative
impact on income before income taxes. Conversely, a hypothetical 50 basis points decrease in interest rates as of December 31,
2020 related to variable rate debt agreements not hedged by derivatives would have a $0.8 million positive impact on income
before income taxes.
As of December 31, 2020, our outstanding interest rate swap agreements had a fair value liability position of $5.2 million.
If the market interest rates increased 50 basis points, the result would have a favorable effect to the interest rate swap’s fair
value of $0.9 million. Conversely, if the market interest rates decreased 50 basis points, the result would have an unfavorable
effect to the interest rate swap’s fair value of $0.9 million. As of December 31, 2020, our outstanding interest rate cap contracts
had a fair value asset position of $0.7 million. If the market interest rates increased 50 basis points, the result would have a
favorable effect to the interest rate cap’s fair value of $2.6 million. Conversely, if the market interest rates decreased 50 basis
points, the result would have an unfavorable effect to the interest rate cap’s fair value of $0.5 million.
Our analysis and methods used to assess and mitigate the risks discussed above should not be considered projections of
future risks.
Item 8—Financial Statements and Supplementary Data
Our consolidated financial statements, the notes thereto and the Report of BDO USA, LLP, our Independent Registered
Public Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1 through F-39.
Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
55
Table of Contents
Evaluation of Disclosure Controls and Procedures
Item 9A—Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and 15d-15(e).
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective at the reasonable assurance
level in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings
within the required time period.
Management’s Report on Internal Control over Financial Reporting
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule
13a-15(f) and 15d-15(f)) for Encore Capital Group, Inc. and its subsidiaries (the “Company”). The Company’s internal control
system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the
preparation and fair presentation of published consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable
assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal
control over financial reporting may vary over time. The Company’s processes contain self-monitoring mechanisms and actions
are taken to correct deficiencies as they are identified.
Management has assessed the effectiveness of Encore’s internal control over financial reporting as of December 31, 2020,
based on the criteria for effective internal control described in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that
the Company’s internal control over financial reporting was effective as of December 31, 2020.
BDO USA, LLP, the independent registered public accounting firm that audited the consolidated financial statements
included in this Annual Report on Form 10-K, was engaged to attest to and report on the effectiveness of Encore’s internal
control over financial reporting as of December 31, 2020, as stated in its report below.
56
Table of Contents
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Encore Capital Group, Inc.
San Diego, California
Opinion on Internal Control over Financial Reporting
We have audited Encore Capital Group, Inc.’s (the “Company’s”) internal control over financial reporting as of December
31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated statements of financial condition of the Company as of December 31, 2020 and 2019 and
the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in
the period ended December 31, 2020, and the related notes and our report dated February 24, 2021 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A,
Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Diego, California
February 24, 2021
57
Table of Contents
Changes in Internal Control over Financial Reporting
We implemented certain internal controls related to the adoption of Topic 326, “Financial Instruments – Credit Losses” to
ensure we adequately interpreted the guidance and properly assessed the impact of the standard on our financial statements to
facilitate its adoption effective January 1, 2020. There were no other changes in our system of internal control over financial
reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the year
ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
In the course of our ongoing preparations for management’s report on internal control over financial reporting as required
by Section 404 of the Sarbanes-Oxley Act of 2002, we have identified areas in need of improvement and have taken remedial
actions to strengthen the affected controls as appropriate. We make these and other changes, which do not have a material effect
on our overall internal control over financial reporting, to enhance the effectiveness of our internal control over financial
reporting.
None.
Item 9B—Other Information
58
Table of Contents
PART III
Item 10—Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting
of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting
of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Item 11—Executive Compensation
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting
of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Item 13—Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting
of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting
of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Item 14—Principal Accountant Fees and Services
59
Table of Contents
(a) Financial Statements.
PART IV
Item 15—Exhibits and Financial Statement Schedules
The following consolidated financial statements of Encore Capital Group, Inc. are filed as part of this annual report on
Form 10-K:
Page
F-1
F-3
F-4
F-5
F-6
F-7
F-8
Filed or
Furnished
Herewith
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(b) Exhibits.
Exhibit
Number
3.1.1
3.1.2
3.1.3
3.2
4.1
4.2
4.6
4.6.1
4.6.2
Exhibit Description
Restated Certificate of Incorporation
Certificate of Amendment to the Certificate of
Incorporation
Second Certificate of Amendment to the
Certificate of Incorporation
Bylaws, as amended through February 8, 2011
Form of Common Stock Certificate
Fourth Amended and Restated Senior Secured
Note Purchase Agreement (including the forms
of the Notes), dated as of September 1, 2020,
by and among Encore Capital Group, Inc. and
the purchasers named therein
Indenture (including form of note), dated as of
March 11, 2014, by and between Encore
Capital Group, Inc., Midland Credit
Management, Inc., as guarantor, and Union
Bank, N.A., as trustee
Supplemental Indenture, dated November 6,
2018, to the Indenture, dated as of March 11,
2014, by and between Encore Capital Group,
Inc., Midland Credit Management, Inc., as
guarantor, and Union Bank, N.A., as trustee
Second Supplemental Indenture, dated October
29, 2020, to the Indenture, dated as of March
11, 2014, by and among Encore Capital Group,
Inc., Midland Credit Management, Inc., as
guarantor, and MUFG Union Bank, N.A., as
trustee
Incorporated By Reference
Form
S-1/A
File
Number
333-77483
8-K
000-26489
Exhibit
3.1
3.1
Filing Date
6/14/1999
4/4/2002
10-Q
10-K
S-3
000-26489
3.1.3
8/7/2019
000-26489
333-163876
3.3
4.7
2/14/2011
12/21/2009
8-K
000-26489
10.2
9/1/2020
8-K
000-26489
4.1
3/11/2014
10-Q
000-26489
4.6
11/7/2018
10-Q
000-26489
4.4
11/2/2020
60
Table of Contents
Exhibit
Number
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing Date
Filed or
Furnished
Herewith
Indenture (including form of note), dated
October 6, 2016, between Cabot Financial
(Luxembourg) S.A., Cabot Credit Management
Limited, Cabot Financial Limited, the
subsidiary guarantors party thereto, J.P.
Morgan Europe Limited, as security agent,
Citibank, N.A., London Branch as trustee,
principal paying agent and transfer agent and
Citigroup Global Markets Deutschland AG, as
registrar
First Supplemental Indenture dated September
7, 2020 to Indenture dated October 6, 2016
Second Supplemental Indenture dated
September 24, 2020 to Indenture dated October
6, 2016
Indenture (including form of note), dated
March 3, 2017, by and among Encore Capital
Group, Inc., Midland Credit Management, Inc.,
as guarantor, and MUFG Union Bank, N.A., as
trustee
First Supplemental Indenture, dated October
29, 2020, to the Indenture, dated as of March 3,
2017, by and among Encore Capital Group,
Inc., Midland Credit Management, Inc., as
guarantor, and MUFG Union Bank, N.A., as
trustee
Indenture, dated July 20, 2018, between
Encore Capital Europe Finance Limited and
MUFG Union Bank, N.A.
Supplemental Indenture (including the form of
4.50% Exchangeable Senior Notes due 2023),
dated July 20, 2018, among Encore Capital
Europe Finance Limited, Encore Capital
Group, Inc. and MUFG Union Bank, N.A.
Second Supplemental Indenture, dated October
29, 2020, to the Indenture, dated as of July 20,
2018, by and among Encore Capital Europe
Finance Limited, Encore Capital Group, Inc.,
as guarantor, and MUFG Union Bank, N.A., as
trustee
Indenture (including form of note), dated
September 9, 2019, by and among Encore
Capital Group, Inc., Midland Credit
Management, Inc., as guarantor, and MUFG
Union Bank, N.A., as trustee.
First Supplemental Indenture, dated October
29, 2020, to the Indenture, dated as of
September 9, 2019, by and among Encore
Capital Group, Inc., Midland Credit
Management, Inc., as guarantor, and MUFG
Union Bank, N.A., as trustee
Description of Registrant’s Securities
Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934
Indenture dated September 24, 2020 between
Encore Capital Group, Inc., the subsidiary
guarantors party thereto, Citibank, N.A.,
London Branch as trustee and Truist Bank as
security agent
4.9
4.9.1
4.9.2
4.10
4.10.1
4.11
4.11.1
4.11.2
4.13
4.13.1
4.14
4.15
8-K
000-26489
4.1
10/7/2016
8-K
000-26489
4.3
9/24/2020
8-K
000-26489
4.5
9/24/2020
8-K
000-26489
4.1
3/3/2017
10-Q
000-26489
4.5
11/2/2020
8-K
000-26489
4.1
7/20/2018
8-K
000-26489
4.2
7/20/2018
10-Q
000-26489
4.6
11/2/2020
8-K
000-26489
4.1
9/10/2019
10-Q
000-26489
4.7
11/2/2020
10-K
000-26489
4.14
2/26/2020
8-K
000-26489
4.1
9/24/2020
61
Table of Contents
Exhibit
Number
4.16
4.17
10.1+
10.3+
10.3.2+
10.4+
10.4.1+
10.4.2+
10.4.8+
10.4.14+
10.5+
10.6+
10.7+
10.8+
10.8.1+
10.9+
10.11+
10.11.1+
10.11.2+
Exhibit Description
Indenture dated November 23, 2020 between
Encore Capital Group, Inc., the subsidiary
guarantors party thereto, Citibank, N.A.,
London Branch as trustee and Truist Bank as
security agent
Indenture dated December 21, 2020 between
Encore Capital Group, Inc., the subsidiary
guarantors party thereto, Citibank, N.A.,
London Branch as trustee and Truist Bank as
security agent
Form of Indemnification Agreement
Encore Capital Group, Inc. 2005 Stock
Incentive Plan, as amended and restated
Form of Non-Incentive Stock Option
Agreement under the Encore Capital Group,
Inc. 2005 Stock Incentive Plan
Encore Capital Group, Inc. 2013 Incentive
Compensation Plan
First Amendment to Encore Capital Group,
Inc. 2013 Incentive Compensation Plan, dated
February 20, 2014
Form of Non-Incentive Stock Option
Agreement under the Encore Capital Group,
Inc. 2013 Incentive Compensation Plan
Form of Restricted Stock Unit Grant Notice
and Agreement (Non-Employee Director)
under the Encore Capital Group, Inc. 2013
Incentive Compensation Plan
Form of Performance Stock Option Agreement
under the Encore Capital Group, Inc. 2013
Incentive Compensation Plan
Encore Capital Group, Inc. Executive
Separation Plan
Employment offer letter dated October 9, 2014
by and between Encore Capital Group, Inc. and
Jonathan Clark
Non-Employee Director Compensation
Program Guidelines, effective June 17, 2020
Non-Employee Director Deferred Stock
Compensation Plan
First Amendment to Non-Employee Director
Deferred Stock Compensation Plan, dated
August 11, 2016
Letter, dated June 15, 2017, from Encore
Capital Group, Inc. to Ashish Masih
The Encore Capital Group, Inc. 2017 Incentive
Award Plan
Form of Restricted Stock Unit Grant Notice
and Award Agreement under the Encore
Capital Group, Inc. 2017 Incentive Award Plan
Form of Restricted Stock Unit Grant Notice
and Award Agreement under the Encore
Capital Group, Inc. 2017 Incentive Award Plan
(Executive Separation Plan Participant)
Incorporated By Reference
Form
File
Number
Exhibit
Filing Date
Filed or
Furnished
Herewith
8-K
000-26489
4.1
11/23/2020
8-K
000-26489
4.1
12/21/2020
8-K
8-K
000-26489
10.1
5/4/2006
000-26489
10.1
6/15/2009
10-Q
000-26489
10.3
11/1/2012
Def
14A
000-26489 Appendix
A
4/26/2013
10-K
000-26489
10.84
2/25/2014
10-Q
000-26489
10.5
8/8/2013
10-Q
000-26489
10.11
8/8/2013
10-K
000-26489
10.108
2/23/2017
10-Q
000-26489
10.2
11/6/2014
8-K
000-26489
10.1
2/26/2015
10-Q
000-26489
10.1
8/5/2020
10-Q
000-26489
10.2
8/4/2016
10-Q
000-26489
10.1
11/9/2016
8-K
000-26489
10.1
6/20/2017
8-K
000-26489
10.3
6/20/2017
8-K
000-26489
10.4
6/20/2017
8-K
000-26489
10.5
6/20/2017
62
Table of Contents
Exhibit
Number
10.11.3+
10.11.4+
10.11.5+
10.11.6+
10.11.7+
10.11.8+
10.11.9+
10.19
10.21.1
10.21.2
10.21.3
10.21.4
10.21.5
Exhibit Description
Form of Restricted Stock Award Grant Notice
and Award Agreement under the Encore
Capital Group, Inc. 2017 Incentive Award Plan
Form of Stock Option Grant Notice and Award
Agreement under the Encore Capital Group,
Inc. 2017 Incentive Award Plan
Form of Performance Share Unit Award Grant
Notice and Award Agreement (EPS) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan (Executive Separation Plan
Participant)
Form of Performance Share Unit Award Grant
Notice and Award Agreement (EPS) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan
Form of Performance Share Unit Award Grant
Notice and Award Agreement (TSR) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan (Executive Separation Plan
Participant)
Form of Performance Share Unit Award Grant
Notice and Award Agreement (TSR) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan
Form of Performance Share Unit Award Grant
Notice and Award Agreement (ROAE) under
the Encore Capital Group, Inc. 2017 Incentive
Award Plan
Amended and Restated Senior Facilities
Agreement, dated September 1, 2020, by and
among Encore Capital Group, Inc., the several
guarantors, banks and other financial
institutions and lenders from time to time party
thereto and Truist Bank as Agent and Security
Agent
Letter Agreement, dated March 5, 2014,
between Citibank, N.A. and Encore Capital
Group, Inc., regarding the Base Capped Call
Transaction
Letter Agreement, dated March 5, 2014,
between Credit Suisse International and Encore
Capital Group, Inc., regarding the Base Capped
Call Transaction
Letter Agreement, dated March 5, 2014,
between Morgan Stanley & Co. LLC and
Encore Capital Group, Inc., regarding the Base
Capped Call Transaction
Letter Agreement, dated March 5, 2014,
between Société Générale and Encore Capital
Group, Inc., regarding the Base Capped Call
Transaction
Letter Agreement, dated March 6, 2014,
between Citibank, N.A. and Encore Capital
Group, Inc., regarding the Additional Capped
Call Transaction
Incorporated By Reference
Form
File
Number
Exhibit
Filing Date
Filed or
Furnished
Herewith
8-K
000-26489
10.6
6/20/2017
8-K
000-26489
10.7
6/20/2017
8-K
000-26489
10.1
3/15/2018
8-K
000-26489
10.2
3/15/2018
8-K
000-26489
10.3
3/15/2018
8-K
000-26489
10.4
3/15/2018
10-K
000-26489
10.11.9
2/26/2020
8-K
000-26489
10.1
9/1/2020
8-K
000-26489
10.1
3/11/2014
8-K
000-26489
10.2
3/11/2014
8-K
000-26489
10.3
3/11/2014
8-K
000-26489
10.4
3/11/2014
8-K
000-26489
10.5
3/11/2014
63
Table of Contents
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing Date
Filed or
Furnished
Herewith
8-K
000-26489
10.6
3/11/2014
8-K
000-26489
10.7
3/11/2014
8-K
000-26489
10.8
3/11/2014
8-K
000-26489
10.1
2/24/2020
8-K
000-26489
10.1
7/20/2018
8-K
000-26489
10.2
7/20/2018
8-K
000-26489
10.3
7/20/2018
8-K
000-26489
10.4
7/20/2018
8-K
000-26489
10.5
7/20/2018
8-K
000-26489
10.6
7/20/2018
10-Q
000-26489
10.2+
5/11/2020
Letter Agreement, dated March 6, 2014,
between Credit Suisse International and Encore
Capital Group, Inc., regarding the Additional
Capped Call Transaction
Letter Agreement, dated March 6, 2014,
between Morgan Stanley & Co. LLC and
Encore Capital Group, Inc., regarding the
Additional Capped Call Transaction
Letter Agreement, dated March 6, 2014,
between Société Générale and Encore Capital
Group, Inc., regarding the Additional Capped
Call Transaction
Senior Facility Agreement, dated February 18,
2020, between Cabot Securitisation UK
Limited, Cabot Financial (UK) Limited, HSBC
Corporate Trustee Company (UK) Limited as
Security Trustee, HSBC Bank PLC as Senior
Agent and Goldman Sachs International Bank
as Senior Lender
Letter Agreement, dated July 17, 2018,
between Bank of Montreal and Encore Capital
Group, Inc. regarding the Base Capped Call
Transaction
Letter Agreement, dated July 17, 2018,
between Credit Suisse International and Encore
Capital Group, Inc. regarding the Base Capped
Call Transaction
Letter Agreement, dated July 17, 2018,
between Bank of America, N.A. and Encore
Capital Group, Inc. regarding the Base Capped
Call Transaction
Letter Agreement, dated July 19, 2018,
between Bank of Montreal and Encore Capital
Group, Inc. regarding the Additional Capped
Call Transaction
Letter Agreement, dated July 19, 2018,
between Credit Suisse International and Encore
Capital Group, Inc. regarding the Additional
Capped Call Transaction
Letter Agreement, dated July 19, 2018,
between Bank of America, N.A. and Encore
Capital Group, Inc. regarding the Additional
Capped Call Transaction
Executive Service Agreement, dated
November 25, 2019, between Cabot UK
Holdco Limited and Craig Buick
List of Subsidiaries
List of Issuers of Guaranteed Securities
Consent of Independent Registered Public
Accounting Firm, BDO USA, LLP, dated
February 24, 2021
Certification of the Principal Executive Officer
pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934
X
X
X
X
Exhibit
Number
10.21.6
10.21.7
10.21.8
10.22
10.23.1
10.23.2
10.23.3
10.23.4
10.23.5
10.23.6
10.26+
21
22
23
31.1
64
Table of Contents
Exhibit
Number
31.2
32.1
Exhibit Description
Certification of the Principal Financial Officer
pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934
Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)
101.INS XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
Document
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document
101.DEF XBRL Taxonomy Extension Definition
Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase
Document
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document
Cover Page Interactive Data File (formatted as
Inline XBRL and contained in Exhibit 101)
104
Incorporated By Reference
Form
File
Number
Exhibit
Filing Date
Filed or
Furnished
Herewith
X
X
X
X
X
X
X
X
X
+
Management contract or compensatory plan or arrangement.
None.
Item 16—Form 10-K Summary
65
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENCORE CAPITAL GROUP, INC.,
a Delaware corporation
By:
/s/ ASHISH MASIH
Ashish Masih
President and Chief Executive Officer
Date: February 24, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature
Title
Date
/s/ ASHISH MASIH
Ashish Masih
President and Chief Executive
Officer and Director
(Principal Executive Officer)
February 24, 2021
/s/ JONATHAN C. CLARK
Jonathan C. Clark
/s/ ASHWINI GUPTA
Ashwini Gupta
/s/ WENDY G. HANNAM
Wendy G. Hannam
/s/ JEFFREY A. HILZINGER
Jeffrey A. Hilzinger
/s/ ANGELA A. KNIGHT
Angela A. Knight
/s/ MICHAEL P. MONACO
Michael P. Monaco
/s/ LAURA OLLE
Laura Olle
/s/ RICHARD J. SREDNICKI
Richard J. Srednicki
/s/ RICHARD P. STOVSKY
Richard P. Stovsky
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
Director
Director
Director
Director
Director
Director
Director
Director
66
Table of Contents
ENCORE CAPITAL GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Note 2: Fair Value Measurements
Note 3: Derivatives and Hedging Instruments
Note 4: Investment in Receivable Portfolios, Net
Note 5: Deferred Court Costs, Net
Note 6: Composition of Certain Financial Statement Items
Note 7: Borrowings
Note 8: Variable Interest Entities
Note 9: Stock-Based Compensation
Note 10: Income Taxes
Note 11: Leases
Note 12: Commitments and Contingencies
Note 13: Segment and Geographic Information
Note 14: Goodwill and Identifiable Intangible Assets
Page
F-1
F-3
F-4
F-5
F-6
F-7
F-8
F-8
F-14
F-17
F-19
F-21
F-22
F-23
F-28
F-28
F-30
F-33
F-35
F-36
F-37
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Encore Capital Group, Inc.
San Diego, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Encore Capital Group, Inc. (the
“Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income,
equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Changes in Accounting Principles
As discussed in Notes 1 and 4 to the consolidated financial statements, effective January 1, 2020, the Company adopted
Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments—Credit Losses.
As discussed in Notes 1 to the consolidated financial statements, effective January 1, 2019, the Company adopted ASC
Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Investment in Receivable Portfolios, Revenue from Receivable Portfolios and Changes in Expected Current and Future
Recoveries
As more fully described in Notes 1 and 4 to the consolidated financial statements, the Company’s investment in receivable
portfolios balance was approximately $3.3 billion at December 31, 2020. Investment in receivable portfolios are comprised of
loans with deteriorated credit quality since origination upon purchase. In accordance with the Company’s charge-off policy
each loan is deemed to be uncollectible on an individual basis. Receivable portfolio purchases are grouped based on similar risk
F-1
characteristics (“pool”) and a negative allowance is established based on future recoveries of the pool using a discounted cash
flow approach. The discount rate is an effective interest rate (or “EIR”) based on the purchase price of the portfolio and the
expected future cash flows at the time of purchase and does not change over the life of the pool unless the risk characteristics of
the pool change. Revenue from receivable portfolios is recognized at an EIR through the accretion of the discount on the
negative allowance, differences between actual versus expected recoveries and the present value of changes in expected future
recoveries. The Company reviews each pool for current trends, actual versus expected performance and expected timing of cash
flows (curve shape). The Company then re-forecasts the timing and amount of future recoveries.
We identified the recording of investment in receivable portfolios, revenue from receivable portfolios and changes in
expected current and future recoveries as a critical audit matter. Specifically, management is required to make significant
judgments and assumptions to estimate future recoveries. Estimated future recoveries are based on historical experience, current
conditions, and reasonable and supportable forecasts. Auditing these elements involved especially challenging auditor judgment
due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
•
•
•
Testing the design and operating effectiveness of controls over management’s assessment of the reasonableness
of: (i) inputs and outputs from the Company’s proprietary statistical and behavioral models used to forecast
collections, (ii) cash collection performance of pools, and (iii) a pool’s EIR.
Testing the completeness and accuracy of collection data used by management to calculate investment in
receivable portfolios, revenue from receivable portfolios and changes in expected current and future recoveries.
Evaluating the Company’s process used to develop estimates of future recoveries by testing source data and
evaluating the reasonableness of assumptions by comparing to historical results, including current period forecasts
to actual performance, recent performance trends, curve shape and changes to the expected recoveries.
Goodwill Impairment Assessment
As more fully described in Notes 1 and 14 to the consolidated financial statements, the Company’s goodwill balance was
approximately $0.9 billion at December 31, 2020, which was allocated between two reporting units, MCM and Cabot, that
carried goodwill. The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each
reporting unit to its carrying value. For the MCM reporting unit, management performed a qualitative assessment and
determined it was not necessary to perform a quantitative test. For the Cabot reporting unit, management performed a
quantitative analysis which utilized a combination of the income approach and the market approach.
We identified the goodwill impairment assessment of the Cabot reporting unit as a critical audit matter because of the
significant assumptions and judgments management makes as part of the assessment to estimate the fair value of the reporting
unit. The income approach requires significant management assumptions such as assumptions used in the cash flow forecasts,
the discount rate, and the terminal value exit multiple. The market approach requires significant management judgment in the
selection of the appropriate peer group companies and the valuation multiples. Auditing these significant assumptions and
judgments involved a high degree of auditor judgment and an increased extent of effort, including the extent of specialized skill
or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
•
•
Testing the design and operating effectiveness of controls over goodwill impairment assessment, including
controls over significant management assumptions and judgments used in the income and the market approaches.
Testing management’s process for developing fair value estimates including testing the completeness, accuracy,
and relevance of underlying data and evaluating significant management assumptions by comparing to historical
results and market participant data.
Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) assessing the appropriateness
of the fair value methodology, (ii) evaluating the reasonableness of certain assumptions used including the
discount rate and the terminal value exit multiple, and (iii) assessing the reasonableness of the discount rate by
developing independent estimates and comparing estimates to those utilized by management.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2001.
San Diego, California
February 24, 2021
F-2
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
Cash and cash equivalents
Investment in receivable portfolios, net
Assets
Deferred court costs, net
Property and equipment, net
Other assets
Goodwill
Total assets
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities
Borrowings
Other liabilities
Total liabilities
Commitments and contingencies (Note 12)
Equity:
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no
shares issued and outstanding
Common stock, $0.01 par value, 75,000 shares authorized, 31,345 shares and
31,097 shares issued and outstanding as of December 31, 2020 and
December 31, 2019, respectively
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive loss
Total Encore Capital Group, Inc. stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
December 31,
2020
December 31,
2019
$
189,184 $
3,291,918
—
127,297
349,162
906,962
192,335
3,283,984
100,172
120,051
329,223
884,185
$
$
4,864,523 $
4,909,950
215,920 $
3,281,634
146,893
3,644,447
223,911
3,513,197
147,436
3,884,544
—
—
313
230,440
1,055,668
(68,813)
1,217,608
2,468
1,220,076
$
4,864,523 $
311
222,590
888,058
(88,766)
1,022,193
3,213
1,025,406
4,909,950
The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated
statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of
consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the
Company. See “Note 8: Variable Interest Entities” for additional information on the Company’s VIEs.
Cash and cash equivalents
Investment in receivable portfolios, net
Assets
Other assets
Borrowings
Other liabilities
Liabilities
December 31,
2020
December 31,
2019
$
2,223 $
553,621
5,127
478,131
37
34
539,596
4,759
464,092
—
See accompanying notes to consolidated financial statements
F-3
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Revenues
Revenue from receivable portfolios
Changes in expected current and future recoveries
Servicing revenue
Other revenues
Total revenues
Year Ended December 31,
2020
2019
2018
$
1,374,717 $
7,246
115,118
4,319
1,269,288 $
—
126,527
9,974
1,167,132
—
148,044
5,381
1,501,400
1,405,789
1,320,557
(Allowances) allowance reversals on receivable portfolios,
net
Total revenues, adjusted by net allowances
(8,108)
1,397,681
41,473
1,362,030
Operating expenses
Salaries and employee benefits
Cost of legal collections
General and administrative expenses
Other operating expenses
Collection agency commissions
Depreciation and amortization
Goodwill impairment
Total operating expenses
Income from operations
Other expense
Interest expense
Loss on extinguishment of debt
Other expense
Total other expense
Income before income taxes
Provision for income taxes
Net income
Net (income) loss attributable to noncontrolling interest
Net income attributable to Encore Capital Group, Inc. stockholders
Earnings per share attributable to Encore Capital Group, Inc.:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
$
$
$
378,176
239,071
149,113
108,944
49,754
42,780
—
967,838
533,562
376,365
202,670
148,256
108,433
63,865
41,029
10,718
951,336
446,345
369,064
205,204
158,352
134,934
47,948
41,228
—
956,730
405,300
(209,356)
(217,771)
(237,355)
(40,951)
(357)
(8,989)
(18,343)
(250,664)
(245,103)
282,898
201,242
(70,374)
(32,333)
212,524
(676)
211,848 $
168,909
(1,040)
167,869 $
(2,693)
(8,764)
(248,812)
156,488
(46,752)
109,736
6,150
115,886
6.74 $
6.68 $
5.38 $
5.33 $
4.09
4.06
31,427
31,710
31,210
31,474
28,313
28,572
See accompanying notes to consolidated financial statements
F-4
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income
(In Thousands)
Net income
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on derivative instruments:
Unrealized gain (loss) on derivative instruments
Income tax effect
Unrealized gain (loss) on derivative instruments, net of
tax
Change in foreign currency translation:
Year Ended December 31,
2020
2019
2018
$
212,524 $
168,909 $
109,736
234
(66)
(5,029)
761
(7,658)
1,743
168
(4,268)
(5,915)
Unrealized gain (loss) on foreign currency translation
17,160
23,169
(36,927)
Removal of other comprehensive loss in connection with
divestiture
Unrealized gain (loss) on foreign currency translation,
net of divestiture
Other comprehensive income (loss), net of tax
Comprehensive income
Comprehensive (income) loss attributable to noncontrolling interest:
Net (income) loss attributable to noncontrolling interest
Unrealized (income) loss on foreign currency translation
Comprehensive (income) loss attributable to
noncontrolling interest
2,632
3,814
3,663
19,792
19,960
232,484
26,983
22,715
191,624
(676)
(7)
(1,040)
(494)
(33,264)
(39,179)
70,557
6,150
5,548
(683)
(1,534)
11,698
Comprehensive income attributable to Encore Capital Group, Inc.
stockholders
$
231,801 $
190,090 $
82,255
See accompanying notes to consolidated financial statements
F-5
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(In Thousands)
Balance as of December 31, 2017
25,801 $ 258 $
42,646 $
616,314 $
(77,356) $
(9,929) $ 571,933
Common Stock Additional
Paid-In
Shares
Capital
Par
Accumulated
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interest
Total
Equity
—
—
—
—
—
—
115,886
—
—
(37,294)
(1,359)
114,527
920
(36,374)
Net income (loss)
Other comprehensive (loss) income, net of tax
Change in fair value of redeemable noncontrolling
interest
—
—
19,430
(12,011)
Purchase of noncontrolling interest
—
—
—
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Issuance of common stock
Stock-based compensation
Issuance of exchangeable notes
Exchangeable notes hedge transactions
Net equity adjustment on Cabot Transaction
Other
Balance as of December 31, 2018
Net income
Other comprehensive income, net of tax
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Stock-based compensation
Issuance of exchangeable notes
Exchangeable notes hedge transactions
Other
163
4,920
2
49
—
—
—
—
—
—
—
—
(2,510)
181,138
12,980
14,009
(17,785)
(43,097)
—
—
1,687
30,884
309
208,498
—
—
—
—
213
2
—
—
—
—
—
—
—
—
—
—
(4,874)
12,557
4,733
1,792
(116)
Balance as of December 31, 2019
31,097
311
222,590
Cumulative adjustment
Net income
Other comprehensive income, net of tax
—
—
—
—
—
—
—
—
—
Purchase of noncontrolling interest
—
—
(2,394)
Issuance of share-based awards, net of shares withheld
for employee taxes
Stock-based compensation
Other
248
2
—
—
—
—
(6,316)
16,560
—
—
—
—
—
—
—
—
—
720,189
167,869
—
—
—
—
—
—
888,058
(44,238)
211,848
—
—
—
—
—
—
—
—
—
—
—
—
—
3,663
(110,987)
—
18,407
—
—
—
—
3,814
(88,766)
—
—
17,321
—
—
—
2,632
—
9,626
7,419
9,626
—
—
—
—
—
—
2,421
1,679
1,040
494
—
—
—
—
—
(2,508)
181,187
12,980
14,009
(17,785)
(43,097)
7,771
819,688
168,909
18,901
(4,872)
12,557
4,733
1,792
3,698
3,213
1,025,406
—
676
7
(1,428)
—
—
—
(44,238)
212,524
17,328
(3,822)
(6,314)
16,560
2,632
Balance as of December 31, 2020
31,345 $ 313 $ 230,440 $ 1,055,668 $
(68,813) $
2,468 $ 1,220,076
See accompanying notes to consolidated financial statements
F-6
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
(In Thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended December 31,
2020
2019
2018
$
212,524 $
168,909 $
109,736
Depreciation and amortization
Expense related to financing
Other non-cash interest expense, net
Stock-based compensation expense
Deferred income taxes
Goodwill impairment
Changes in expected current and future recoveries
Provision for (reversal of) allowances on receivable portfolios, net
Other, net
Changes in operating assets and liabilities
Deferred court costs
Other assets
Prepaid income tax and income taxes payable
Accounts payable, accrued liabilities and other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of receivable portfolios, net of put-backs
Collections applied to investment in receivable portfolios, net
Purchases of property and equipment
Proceeds from sale of portfolios
Other, net
Net cash provided by (used in) investing activities
Financing activities:
Payment of loan and debt refinancing costs
Proceeds from credit facilities
Repayment of credit facilities
Proceeds from senior secured notes
Repayment of senior secured notes
Proceeds from issuance of convertible and exchangeable senior notes
Repayment of convertible senior notes
Payment for the purchase of PECs and noncontrolling interest
Other, net
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes, net of refunds
Supplemental schedule of non-cash investing and financing activities:
Stock consideration for the Cabot Transaction
Investment in receivable portfolios transferred to real estate owned
Property and equipment acquired through finance leases
$
$
$
42,780
51,117
23,639
16,560
11,898
—
(7,246)
—
16,260
—
8,980
(27,693)
(35,955)
312,864
(644,048)
737,131
(34,600)
—
24,343
82,826
(82,455)
1,820,634
(2,290,822)
1,313,385
(1,033,765)
—
(89,355)
—
(40,822)
(403,200)
(7,510)
4,359
192,335
41,029
3,523
30,299
12,557
22,339
10,718
—
8,108
9,794
(3,646)
29,025
(25,678)
(62,244)
244,733
41,228
11,710
38,549
12,980
16,814
—
—
(41,473)
(7,016)
(17,701)
(17,925)
24,284
15,605
186,791
(1,035,130)
(1,131,095)
757,640
(39,602)
107,937
6,822
(202,333)
(11,586)
603,634
(586,429)
454,573
(470,768)
100,000
(84,600)
—
(24,594)
(19,770)
22,630
12,287
157,418
809,688
(67,475)
—
(8,634)
(397,516)
(23,286)
942,186
(571,144)
—
(91,578)
172,500
—
(234,101)
(28,200)
166,377
(44,348)
(10,373)
212,139
157,418
189,184 $
192,335 $
169,553 $
178,948 $
88,816
43,973
198,797
5,734
— $
— $
180,559
2,214
3,276
5,058
5,299
4,701
3,283
See accompanying notes to consolidated financial statements
F-7
Table of Contents
ENCORE CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an
international specialty finance company providing debt recovery solutions and other related services for consumers across a
broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face
value and manages them by working with individuals as they repay their obligations and work toward financial recovery.
Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit unions,
consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to
bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit
originators for non-performing loans.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market
leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its
subsidiaries and European affiliates (collectively, “Cabot”) the Company is one of the largest credit management services
providers in Europe and a market leader in the United Kingdom and Ireland. These are the Company’s primary operations.
The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as
“LAAP.” In August 2019, the Company completed the sale of Baycorp, which represented the Company’s investments and
operations in Australia and New Zealand.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a
global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 outbreak and
resulting containment measures implemented by governments around the world, as well as increased business uncertainty, have
impacted the Company. The circumstances around the COVID-19 pandemic are rapidly evolving and will continue to impact
the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely
monitor the COVID-19 situation and update its assumptions accordingly.
Basis of Consolidation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) and reflect the accounts and operations of the Company and those of its subsidiaries in
which the Company has a controlling financial interest. The Company also consolidates VIEs for which it is the primary
beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the
entity’s economic performance and (b) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 8:
Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in consolidation.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the
functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates,
and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The
resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are
translated at historical rates, except for the change in retained earnings during the year which is the result of the income
statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement
of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments
and recorded within other comprehensive income or loss. Translation gains or losses are the material components of
accumulated other comprehensive income or loss and are reclassified to earnings upon the substantial sale or liquidation of
investments in foreign operations.
Reclassifications
Certain immaterial reclassifications have been made to the prior years’ consolidated financial statements to conform to
current year presentation. The Company presented certain refinancing charges such as make-whole provisions, call premiums,
and write-offs of unamortized debt issuance costs and debt discount as interest expense in prior periods, and have reclassed
such costs as loss on extinguishment of debt as a single line item in the Company’s consolidated statements of operations rather
than presenting them as part of interest expense. These reclassifications have no effect on net income, total assets, accumulated
earnings or cash flow statements as previously reported.
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Change in Accounting Principle
On January 1, 2020, the Company adopted the new accounting standard for Financial Instruments - Credit Losses
(“CECL”). CECL introduces a new impairment approach for credit loss recognition based on current expected lifetime losses
rather than incurred losses. CECL applies to all financial assets carried at amortized costs, including the Company’s investment
in receivable portfolios, which are defined as purchased credit deteriorated (“PCD”) financial assets under CECL. The adoption
of CECL represents a significant change from the previous U.S. GAAP guidance relating to purchased credit impaired assets
and resulted in changes to the Company’s accounting for its investment in receivable portfolios and the related income from the
receivable portfolios.
As part of the adoption of CECL, the Company changed its accounting methodology for its court costs spent in its legal
collection channel effective January 1, 2020. Previously, the Company capitalized its upfront court costs spent in its
consolidated financial statements (“Deferred Court Costs”) and provided a reserve for those costs that it believed would
ultimately be uncollectible. Effective January 1, 2020, the Company expenses all of its court costs as incurred. All expected
cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative
allowance, or investment in receivable portfolios, at a discounted value. Upon transition, an adjustment was made to retained
earnings to reflect the net change from an undiscounted to discounted value prior to writing-off uncollectible receivables and
establishing a balance for discounted value of future recoveries of amounts expected to be collected.
The Company has not adjusted prior period comparative information and will continue to disclose prior period financial
information in accordance with the previous accounting guidance. The following table summarizes the cumulative effects of
adopting the CECL guidance on the Company’s consolidated statements of financial condition as of January 1, 2020 (in
thousands):
Assets
Investment in receivable portfolios, net
$
3,283,984 $
44,166 $
3,328,150
Balance as of
December 31, 2019
Adjustment
Opening Balance as
of January 1, 2020
Deferred court costs, net
Liabilities
100,172
(100,172)
—
Other liabilities (for deferred tax liabilities)
147,436
(11,768)
135,668
Equity
Accumulated earnings
888,058
(44,238)
843,820
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. The ASU provides optional expedients and exceptions for applying GAAP to
transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the
potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Additionally, in
January 2021, the FASB issued ASU 2021-01, which clarifies the scope of Topic 848 and allows entities to elect certain
optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by
changes in the interest rates. These ASUs are effective as of March 12, 2020 through December 31, 2022 and may be applied
prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31,
2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standards. The ASUs
are currently not expected to have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2019, the Company adopted Accounting Standard Codification 842 - Leases using the modified
retrospective method. Refer to “Note 11: Leases” for details of the Company’s leases.
Recent Accounting Pronouncements
Recent Accounting Pronouncements Not Yet Effective
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2020-06, Debt — Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging — Contracts in
Entity’s Own Equity (“Subtopic 815-40”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
(“ASU 2020-06”). The ASU simplifies the accounting for convertible instruments by removing certain models in Subtopic
470-20 and revises the guidance in Subtopic 815-40 to simplify the accounting for contracts in an entity’s own equity. The ASU
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also amends the guidance to improve the consistency of earnings per share calculations, which requires the if-converted method
be used for convertible instruments. ASU 2020-06 is effective for reporting periods beginning after December 15, 2021 with
early adoption permitted for reporting periods beginning after December 15, 2020. The amendment is to be adopted through
either a modified retrospective or fully retrospective method of transition. Under ASU 2020-06, the Company’s convertible and
exchangeable notes will no longer be bifurcated to a debt component and an equity component, instead, they will be carried as a
single liability. The interest expense recognized on the convertible and exchangeable notes will be based on coupon rates, rather
than higher effective interest rates. As a result, the Company will recognize lower interest expense. The Company’s convertible
and exchangeable notes require net share settlement. Additionally, the if-converted method will not substantially change the
dilutive effect for convertible instruments that require net share settlement, only in-the-money shares will be included in the
dilutive effect. The Company will early adopt ASU 2020-06 as of January 1, 2021 using a modified-retrospective approach, by
recording a decrease to opening accumulated earnings of approximately $16.1 million, which represents the debt discount of all
outstanding convertible and exchangeable notes as of December 31, 2020, adjusted for income tax effect. Implementation
efforts have been substantially complete.
With the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet
effective as of December 31, 2020 that have significance, or potential significance, to the Company’s consolidated financial
statements.
Use of Estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The inputs into
the judgments and estimates consider the economic implications of the COVID-19 pandemic on the Company’s critical and
significant accounting estimates. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the date of
purchase. The Company maintains its cash and cash equivalents in multiple financial institutions and certain account balances
exceed federally insurable limits. To date, the Company has experienced no loss or lack of access to cash in its bank accounts.
The Company believes any risks are mitigated by maintaining cash with highly rated financial institutions. The carrying
amounts reported in the consolidated statements of financial condition for cash and cash equivalents approximate their fair
value.
Included in cash and cash equivalents is cash collected on behalf of and due to third-party clients. A corresponding
balance is included in accounts payable and accrued liabilities. The balance of cash held for clients was $20.3 million and $25.0
million as of December 31, 2020 and 2019, respectively.
Investment in Receivable Portfolios
Current Accounting Policy
As a result of the adoption of CECL, the Company revised its accounting policy for investment in receivable portfolios
effective January 1, 2020:
The Company purchases portfolios of loans that have experienced significant deterioration of credit quality since
origination from banks and other financial institutions. These financial assets are defined as purchased credit deteriorated (or
“PCD”) assets under CECL. Under the PCD accounting model, the purchased assets are recognized at their face value with an
offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan
level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its
charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual
receivables immediately after purchasing the portfolio. The Company then records a negative allowance that represents the
present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted
cash flow approach, which ultimately equals the amount paid for a portfolio purchase and presented as “Investment in
receivable portfolios, net” in the Company’s consolidated statements of financial condition. The discount rate is an effective
interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of
purchase. The amount of the negative allowance (i.e., investment in receivable portfolios) will not exceed the total amortized
cost basis of the loans written-off.
Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk
characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location.
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The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios.
The Company further groups these static pools by geographic location. Once a pool is established, the portfolios will remain in
the designated pool unless the underlying risk characteristics change, which is not expected due to the delinquent nature of the
individual loans. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.
Revenue is recognized for each static pool over the economic life of the pool. The Company makes significant
assumptions in determining the economic life of a pool, including the reasonable and supportable economic forecast period
based on asset type and geography, which considers the availability of forward-looking scenarios and their respective time
horizons. In general, the Company forecasts recoveries over one or two years prior to reverting to historical averages at an
estimate-level over the remaining life using various methodologies depending on the asset type and geography. The speed at
which forecasts revert varies based on the spread between the forecast period and historical data. In addition, estimated
recoveries include a qualitative component, which generally reflects management’s assessment of macroeconomic environment
and business initiatives. The Company continues to evaluate the reasonable economic life of a pool and reversion method
annually. Revenue primarily includes two components: (1) accretion of the discount on the negative allowance due to the
passage of time, which is included in “Revenue from receivable portfolios” and (2) changes in expected cash flows, which
includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value
change of expected future recoveries, and is presented in our consolidated statements of operations as “Changes in expected
current and future recoveries.”
The Company measures expected future recoveries based on historical experience, current conditions, and reasonable and
supportable forecasts. Factors that may change the expected future recoveries may include both internal as well as external
factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External
factors that may have an impact on our collections include macroeconomic conditions, new laws or regulations, and new
interpretations of existing laws or regulations.
The Company elected not to maintain its previously formed pool groups with amortized costs at transition. Certain pools
already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to the transition. The Company did not
establish a negative allowance from ZBA pools as the Company elected the Transition Resource Group for Credit Losses’
practical expedient to retain the integrity of its legacy pools. All subsequent collections to the ZBA pools are recognized as
ZBA revenue, which is included in revenue from receivable portfolios in the Company’s consolidated statements of operations.
Accounting Policy Prior to January 1, 2020
Discrete receivable portfolio purchases during the same fiscal quarter were aggregated into pools based on common risk
characteristics. Once a static pool was established, the portfolios were permanently assigned to the pool. Receivable portfolios
were recorded at cost at the time of acquisition. The purchase cost of the portfolios included certain fees paid to third parties
incurred in connection with the direct acquisition of the receivable portfolios.
Revenues were calculated using either the interest method or the cost recovery method. The interest method applies an
internal rate of return (“IRR”) to the cost basis of the pool, which remained unchanged throughout the life of the pool, unless
there was an increase in subsequent expected cash flows. Subsequent increases in expected cash flows were recognized
prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash
flows did not change the IRR, but were recognized as an allowance to the cost basis of the pool, and were reflected in the
consolidated statements of operations as an adjustment to revenue, with a corresponding valuation allowance, offsetting the
investment in receivable portfolios in the consolidated statements of financial condition. With gross collections being
discounted at monthly IRRs, when collections were lower in the near term, even if substantially higher collections were
expected later in the collection curve, an allowance charge could result.
The Company accounted for each static pool as a unit for the economic life of the pool (similar to one loan) for
recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for
provision for loss or allowance. Revenue from receivable portfolios was accrued based on each pool’s IRR applied to each
pool’s adjusted cost basis. The cost basis of each pool was increased by revenue earned and portfolio allowance reversals and
decreased by gross collections and portfolio allowances. Once the net book value of a static pool has been fully recovered, it
became ZBA and all subsequent collections were recognized as ZBA revenue.
If the amount and timing of future cash collections on a pool of receivables were not reasonably estimable, the Company
accounted for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios had
different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary
information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios.
Under the cost recovery method of accounting, no revenue was recognized until the carrying value of a Cost Recovery Portfolio
has been fully recovered.
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See “Note 4: Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios.
Transfers of Financial Assets
The Company accounts for transfers of financial assets as sales when it has surrendered control over the related assets.
Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an
assessment of the nature and extent of the Company’s ongoing involvement with the assets transferred. Gains and losses
stemming from transfers reported as sales are included in “Other revenues” in the Company’s consolidated statements of
operations. Assets obtained and liabilities incurred in connection with transfers reported as sales are initially recognized in the
statements of financial condition at fair value.
Transfers of financial assets that do not qualify for sale accounting are reported as collateralized borrowings. Accordingly,
the related assets remain on the Company’s statements of financial condition and continue to be reported and accounted for as if
the transfer had not occurred. Cash proceeds from these transfers are reported as liabilities, with attributable interest expense
recognized over the life of the related transactions. To date, the Company has not had any transfers of financial assets that did
not qualify for sale accounting.
Servicing Revenue
Certain of the Company’s subsidiaries earn servicing revenue by providing portfolio management services to credit
originators for non-performing loans. The Company recognizes servicing revenue when it satisfies the performance obligation
over time by providing debt solution and credit management services. The Company typically invoices for its services monthly
with payment terms of 30 days.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the value assigned to tangible and identifiable intangible assets,
liabilities assumed, and noncontrolling interest of businesses acquired. Acquired intangible assets other than goodwill are
amortized over their useful lives unless the lives are determined to be indefinite. Goodwill is tested at the reporting unit level
annually for impairment and in interim periods if certain events occur indicating the fair value of a reporting unit may be below
its carrying value. See “Note 14: Goodwill and Identifiable Intangible Assets” for further discussion of the Company’s goodwill
and other intangible assets.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. The provision for
depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as
follows:
Fixed Asset Category
Leasehold improvements
Furniture, fixtures and equipment
Computer hardware and software
Estimated Useful Life
Lesser of lease term, including periods covered
by renewal options, or useful life
5 to 10 years
3 to 5 years
Maintenance and repairs are charged to expense in the year incurred. Expenditures for major renewals that extend the
useful lives of fixed assets are capitalized and depreciated over the useful lives of such assets.
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company measures recoverability by comparing the carrying
amount to the future undiscounted cash flows that the asset is expected to generate. If the asset is not recoverable, its carrying
amount would be adjusted down to its fair value.
Deferred Court Costs
The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its
internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has
sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections, the
Company is required to pay certain upfront costs to the applicable courts that are recoverable from the consumer. Effective
January 1, 2020, the Company expenses all of its court costs as incurred and no longer capitalizes such costs as Deferred Court
Costs. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement
of the negative allowance, or investment in receivable portfolios, at a discounted value.
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Prior to January 1, 2020, the Company capitalized Deferred Court Costs in its consolidated financial statements and
provided a reserve for those costs that it estimated to be uncollectible. The Company determined the reserve based on an
estimated court cost recovery rate established based on its analysis of historical court costs recovery data. The Company
estimated deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and wrote off any Deferred
Court Costs not recovered within the respective deferral period. Collections received from debtors were first applied against
related court costs with the balance applied to the debtors’ account balance. See “Note 5: Deferred Court Costs, Net” for further
details.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. When the Company prepares its
consolidated financial statements, it estimates income taxes based on the various jurisdictions and countries where it conducts
business. This requires the Company to estimate current tax exposure and to assess temporary differences that result from
differing treatments of certain items for tax and accounting purposes. Deferred income taxes are recognized based on the
differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The Company then assesses the likelihood that deferred tax assets will be
realized. Valuation allowances are established, when it is more likely than not the deferred tax assets will not be realized. When
the Company establishes a valuation allowance or increases this allowance in an accounting period, it records a corresponding
tax expense in the consolidated statements of operations. The Company includes interest and penalties related to income taxes
within its provision for income taxes. See “Note 10: Income Taxes” for further discussion.
Management must make significant judgments to determine the provision for income taxes, deferred tax assets and
liabilities, and any valuation allowance to be recorded against deferred tax assets.
Stock-Based Compensation
The Company determines stock-based compensation expense for all share-based payment awards based on the
measurement date fair value. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock
option grants. The Company has certain share awards that include market conditions that affect vesting, the fair value of these
shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as long as the
requisite service is provided. For share awards that require service and performance conditions, the Company recognizes
compensation cost only for those awards expected to meet the service and performance vesting conditions over the requisite
service period of the award. Forfeiture rates are estimated based on the Company’s historical experience. Stock-based
compensation expenses are included in “Salaries and Employee Benefits” in the Company’s consolidated statements of
operations. See “Note 9: Stock-Based Compensation” for further discussion.
Derivative Instruments and Hedging Activities
The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value.
Changes in the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. The
Company designates certain derivative instruments as cash flow hedges. The changes in fair value of derivatives designated as
cash flow hedges is recorded each period, net of tax, in accumulated other comprehensive income or loss until the related
hedged transaction occurs. If in the event the hedged cash flow does not occur, or it becomes probable that it will not occur, the
Company would reclassify the amount of any gain or loss on the related cash flow hedge to income or expense at that time. If
the hedged cash flows are still reasonably possible to occur, the hedged cash flows will continue to be recorded in accumulated
other comprehensive income or loss until the hedged cash flows are no longer probable of occurring. The Company classifies
the cash flows from a derivative instrument that is accounted for as a cash flow hedge (and that does not contain an other-than-
insignificant financing element at inception) in the same category as the cash flows from the items being hedged. See “Note 3:
Derivatives and Hedging Instruments” for further discussion.
Concentration of Supply Risk
A significant percentage of the Company’s portfolio purchases for any given fiscal quarter or year may be concentrated
with a few large sellers, some of which may also involve forward flow arrangements. A significant decrease in the volume of
portfolio available from any of the Company’s principal sellers would force the Company to seek alternative sources of
charged-off receivables.
The Company may be unable to find alternative sources from which to purchase charged-off receivables, and even if it
could successfully replace these purchases, the search could take time and the receivables could be of lower quality, cost more,
or both, any of which could adversely affect the Company’s business, financial condition and operating results.
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Earnings Per Share
Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share is calculated on the basis of the weighted
average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period
using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the
dilutive effect of the convertible and exchangeable senior notes, if applicable.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows for the periods presented (in
thousands, except per share amounts):
Net income attributable to Encore Capital Group, Inc.
$
211,848 $
167,869 $
115,886
Year Ended December 31,
2020
2019
2018
Total weighted-average basic shares outstanding
Dilutive effect of stock-based awards
Total weighted-average dilutive shares outstanding
Basic earnings per share
Diluted earnings per share
31,427
283
31,710
31,210
264
31,474
28,313
259
28,572
$
$
6.74 $
6.68 $
5.38 $
5.33 $
4.09
4.06
Anti-dilutive employee stock options outstanding were approximately 51,000, 64,000 and 66,000 during the years ended
December 31, 2020, 2019, and 2018, respectively.
Note 2: Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an
orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value
hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a
brief description of each level:
•
•
•
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Assets
Cross-currency swap agreements
Interest rate cap contracts
Liabilities
Interest rate swap agreements
Contingent consideration
Fair Value Measurements as of December 31, 2020
Level 1
Level 2
Level 3
Total
$
— $
11,578 $
— $
11,578
—
—
—
659
—
659
(5,232)
—
—
(2,957)
(5,232)
(2,957)
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Assets
Fair Value Measurements as of December 31, 2019
Level 1
Level 2
Level 3
Total
Foreign currency exchange contracts
Interest rate cap contracts
$
— $
—
1,473 $
2,460
— $
—
1,473
2,460
Liabilities
Interest rate swap agreements
Contingent consideration
Derivative Contracts:
—
—
(9,116)
—
—
(66)
(9,116)
(66)
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency
exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These
models project future cash flows and discount the future amounts to a present value using market-based observable inputs,
including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Contingent Consideration:
The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of
the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating
performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of
contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to
fair value at each reporting date, based on actual and forecasted operating performance.
The following table provides a roll-forward of the fair value of contingent consideration for the years ended December 31,
2020, 2019 and 2018 (in thousands):
Balance as of December 31, 2017
Issuance of contingent consideration
Change in fair value of contingent consideration
Payment of contingent consideration
Effect of foreign currency translation
Balance as of December 31, 2018
Change in fair value of contingent consideration
Payment of contingent consideration
Effect of foreign currency translation
Balance as of December 31, 2019
Issuance of contingent consideration
Payment of contingent consideration
Effect of foreign currency translation
Balance as of December 31, 2020
Redeemable Noncontrolling Interest:
Amount
$
$
10,612
1,728
(5,664)
(271)
(207)
6,198
(2,300)
(3,686)
(146)
66
2,848
(88)
131
2,957
Some minority shareholders in certain subsidiaries of the Company had the right, at certain times, to require the Company
to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the
Company chose not to purchase their interests at fair value. In connection with various business transactions, the Company
redeemed or deconsolidated all of its redeemable noncontrolling interest during the year ended December 31, 2018 and no
longer carried any redeemable noncontrolling interest as of December 31, 2018.
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The components of the change in the redeemable noncontrolling interest for the years ended December 31, 2018 are
presented in the following table (in thousands):
Balance as of December 31, 2017
Redemption of redeemable noncontrolling interest
Deconsolidation upon sale of redeemable noncontrolling interest
Net loss attributable to redeemable noncontrolling interest
Adjustment of the redeemable noncontrolling interest to fair value
Effect of foreign currency translation attributable to redeemable noncontrolling interest
Balance as of December 31, 2018
Amount
151,978
(138,835)
5,535
(4,791)
(7,419)
(6,468)
—
$
$
Non-Recurring Fair Value Measurement:
Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified
as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and
estimated selling expenses were determined at the time of initial recognition and in each reporting period using Level 3
measurements. The fair value estimate of the assets held for sale was approximately $42.2 million and $46.7 million as
of December 31, 2020 and December 31, 2019, respectively.
Financial Instruments Not Required To Be Carried At Fair Value
The table below summarizes fair value estimates for the Company’s financial instruments that are not required to be
carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to
represent, the underlying value of the Company. The carrying amounts in the following table are recorded in the consolidated
statements of financial condition as of December 31, 2020 and December 31, 2019 (in thousands):
December 31, 2020
December 31, 2019
Carrying
Amount
Estimated Fair
Value
Carrying
Amount
Estimated Fair
Value
Financial Assets
Investment in receivable portfolios
$
3,291,918 $
3,705,672 $
3,283,984 $
3,464,050
Deferred court costs
Financial Liabilities
—
—
100,172
100,172
Convertible notes and exchangeable notes(1)
Senior secured notes(2)
564,136
622,081
642,547
693,708
1,642,058
1,684,729
1,127,435
1,170,945
________________________
(1) Carrying amount represents the portion of the convertible and exchangeable notes classified as debt, while estimated fair value pertains to the face
amount of the notes.
(2) Carrying amount represents historical cost, adjusted for any related debt discount or debt premium.
Investment in Receivable Portfolios:
The fair value of investment in receivable portfolios is measured using Level 3 inputs by discounting the estimated future
cash flows generated by the Company’s proprietary forecasting models. The key inputs include the estimated future gross cash
flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including
assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its
collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these
key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the
debt recovery and purchasing business.
Deferred Court Costs:
Effective January 1, 2020, the Company no longer carries Deferred Court Costs as a result of its change in accounting
policy. The fair value estimate for Deferred Court Costs as of December 31, 2019 involved Level 3 inputs as there was little
observable market data available and management was required to use significant judgment in its estimates.
F-16
Table of Contents
Borrowings:
The Company’s convertible notes, exchangeable notes and senior secured notes are carried at historical cost, adjusted for
the applicable debt discount. The fair value estimate for the convertible and exchangeable notes incorporates quoted market
prices using Level 2 inputs. The fair value of the senior secured notes is estimated using widely accepted valuation techniques,
including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms,
maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates.
The carrying value of the Company’s senior secured revolving credit facility agreement approximates fair value due to the
short-term nature of the interest rate period. The Company’s borrowings also include private placement notes, securitisation
senior facility and finance lease liabilities for which the carrying value approximates respective fair value.
Note 3: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and
foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment.
The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated
statements of financial condition (in thousands):
Derivatives designated as hedging instruments:
Interest rate cap contracts
Foreign currency exchange contracts
Interest rate swap agreements
Cross-currency swap agreements
Derivatives not designated as hedging instruments:
December 31, 2020
December 31, 2019
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Other assets $
Other assets
659
—
Other assets $
Other assets
Other liabilities
(5,232) Other liabilities
Other assets
11,578
Other assets
2,460
443
(9,116)
—
Foreign currency exchange contracts
Other assets
—
Other assets
1,030
Derivatives Designated as Hedging Instruments
The Company has operations in foreign countries, which expose the Company to foreign currency exchange rate
fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into
derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company
adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all
exposures and derivative positions on an ongoing basis.
The Company held certain foreign currency forward contracts designated as cash flow hedging instruments that matured
in June 2020. As of December 31, 2020, the Company had no outstanding forward contracts that were designated as cash flow
hedging instruments. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that
failed to occur during the years ended December 31, 2020, 2019, or 2018.
The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest
rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company
receives floating interest rate payments and makes interest payments based on fixed interest rates. The Company designates its
interest rate swap instruments as cash flow hedges. Previously, the Company held four interest rate swap agreements that
hedged the risk of USD-LIBOR interest rate fluctuations for the Encore revolving credit facility and term loan facility. As part
of the financing transactions completed in September 2020, the Company settled two of the interest rate swap agreements. As
of December 31, 2020, there were two interest rate swap agreements outstanding with a total notional amount of $196.4
million. The Company expects to reclassify approximately $8.7 million of net derivative loss from OCI into earnings relating to
interest rate swaps within the next 12 months.
In connection with the financing transactions discussed above, the Company entered into cross-currency swap
agreements, which are used to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings
including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt and are accounted for as
cash flow hedges. As of December 31, 2020, there were four cross-currency swap agreements outstanding with a total notional
amount of €350.0 million (approximately $426.8 million based on an exchange rate of $1.00 to €0.82, the exchange rate as of
F-17
Table of Contents
December 31, 2020). The Company expects to reclassify approximately $3.8 million of net derivative loss from OCI into
earnings relating to cross-currency swaps within the next 12 months.
Previously, the Company held two interest rate cap contracts (the “2018 Caps”) that hedged the risk of GBP-LIBOR
interest rate fluctuations for the Cabot Securitisation Senior Facility interest payments. In February 2020, the Company settled
the 2018 Caps and ceased the hedge relationship, which resulted in the reclassification of the associated other comprehensive
loss balance to interest expense for approximately $2.5 million during the first quarter of 2020.
As of December 31, 2020, the Company held two interest rate cap contracts with a notional amount of approximately
$965.8 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate
bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a
notional amount of €400.0 million (approximately $487.7 million based on an exchange rate of $1.00 to €0.82, the exchange
rate as of December 31, 2020) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index
average (“SONIA”) bearing debt (“2020 Cap”) has a notional amount of £350.0 million (approximately $478.1 million based
on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) and matures in 2023. The 2019 Cap is
structured as a series of European call options (“Caplets”) such that if exercised, the Company will receive a payment equal to
3-months EURIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. The 2020 Cap is also
structured as a series of Caplets such that if exercised, the Company will receive a payment equal to SONIA on a notional
amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to
exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash
flows of the interest payments to the extent EURIBOR or SONIA exceeds the strike price of the Caplets. The Company expects
the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments. The
Company expects to reclassify approximately $0.5 million of net derivative loss from OCI into earnings relating to interest rate
caps within the next 12 months.
The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging
instruments in the Company’s consolidated financial statements during the periods presented (in thousands):
Derivatives Designated as Hedging
Instruments
Gain (Loss)
Recognized in OCI
Year Ended December
31,
2020
2019
Location of Gain (Loss) Reclassified from
OCI into Income
Gain (Loss)
Reclassified
from OCI into
Income
Year Ended December
31,
2020
2019
Foreign currency exchange contracts
$
(341) $ 1,100 Salaries and employee benefits
$
49 $
383
Foreign currency exchange contracts
(44)
(56) General and administrative expenses
11
(19)
Interest rate swap agreements
(7,441)
(6,347) Interest expense
(7,893)
(2,560)
Interest rate cap contracts
(3,001)
(1,752) Interest expense
(2,846)
Cross-currency swap agreements
10,503
—
Interest expense / Other expense
10,121
146
—
Derivatives Not Designated as Hedging Instruments
The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations
between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not
designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the
foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or
losses on these derivative contracts are recognized in other income or expense based on the changes in fair value. As of
December 31, 2020, the Company had no outstanding currency exchange forward contracts that were not designated as cash
flow hedging instruments.
In May 2018, in anticipation of the completion of the purchase of all of the outstanding equity of CCM not owned by
Encore (the “Cabot Transaction”), Encore entered into a foreign exchange forward contract with a notional amount of £176.0
million, which was approximately the amount of cash consideration for the Cabot Transaction. The forward contract settled in
August 2018 at a total loss of $9.3 million. This loss was substantially offset by a decrease in the final purchase price in U.S.
dollars for the Cabot Transaction.
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Table of Contents
The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s
consolidated statements of operations during the periods presented (in thousands):
Derivatives Not Designated as Hedging
Instruments
Location of Gain (Loss) Recognized in Income
on Derivative
Amount of Gain (Loss) Recognized in Income
Year ended December 31,
2020
2019
2018
Foreign currency exchange contracts
Other expense
$
3,564 $
(2,959) $
(9,221)
Interest rate cap contracts
Interest expense
—
—
(1,568)
Note 4: Investment in Receivable Portfolios, Net
As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies,”
effective January 1, 2020, the Company accounts for its investment in receivable portfolios as PCD assets under CECL and
changed its accounting policy for reimbursable court costs. As a result, the Company wrote-off the previous Deferred Court
Costs balance that represented an undiscounted value of recoverable historic spend as a result of a loss-rate methodology, and
established a discounted value of expected future recoveries of these reimbursable court costs, which is included in the
beginning balance of the investment in receivable portfolios.
The table below illustrates the Company’s transition approach for its investment in receivable portfolios as of January 1,
2020 (in thousands):
Investment in receivable portfolios prior to transition
Initial transitioned deferred court costs
Allowance for credit losses
Amortized cost
Noncredit discount
Face value
Write-off of amortized cost
Write-off of noncredit discount
Negative allowance
Initial negative allowance from transition
Amount
3,283,984
44,166
3,328,150
79,028,043
82,356,193
132,533,142
214,889,335
(82,356,193)
(132,533,142)
3,328,150
3,328,150
$
$
The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios
purchased during the periods presented (in thousands):
Purchase price
Allowance for credit losses
Amortized cost
Noncredit discount
Face value
Write-off of amortized cost
Write-off of noncredit discount
Negative allowance
Negative allowance for expected recoveries - current period purchases
F-19
Year Ended
December 31, 2020
$
$
659,872
1,703,420
2,363,292
3,464,670
5,827,962
(2,363,292)
(3,464,670)
659,872
659,872
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The following tables summarize the changes in the balance of the investment in receivable portfolios during the periods
presented (in thousands):
Balance, beginning of period
Purchases of receivable portfolios
Deconsolidation of receivable portfolios(1)
Put-backs and Recalls
Disposals and transfers to real estate owned
Sale of receivable portfolios(2)
Cash collections
Revenue from receivable portfolios
Changes in expected current period recoveries
Changes in expected future period recoveries
Portfolio (allowance) reversals, net
Foreign currency adjustments
Balance, end of period
________________________
Year Ended December 31,
2020
2019
2018
$
3,328,150
$
3,137,893
$
2,890,613
659,872
(2,822)
(15,824)
(9,459)
—
1,046,696
1,131,898
(51,935)
(11,591)
(11,495)
(98,636)
—
(14,429)
(12,456)
—
(2,111,848)
(2,026,928)
(1,967,620)
1,374,717
228,075
(220,829)
—
61,886
1,269,288
1,167,132
—
—
(8,108)
38,800
—
—
41,473
(98,718)
$
3,291,918
$
3,283,984
$
3,137,893
(1) Deconsolidation of receivable portfolios as a result of the Company’s divestiture of its investment in Brazil for the year ended December 31, 2020 and
as a result of the sale of Baycorp for the year ended December 31, 2019.
(2) Represents the sale of certain portfolios in the Company’s European operations under its co-investment framework.
Changes in expected current period recoveries represent over and under-performance in the reporting period. Collections
during the year ended December 31, 2020 significantly outperformed the projected cash flows by approximately $228.1
million. The Company believes the collection over-performance was largely driven by the reduced near-term expected
recoveries as a result of adjustments made to the projected cash flow forecast during the first quarter of 2020 associated with the
COVID-19 pandemic. The over-performance was also a result of sustained improvements in portfolio collections driven by
liquidation improvement initiatives.
While the Company now has additional information with respect to the impact on collections of the COVID-19 pandemic,
the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and
spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime
recoveries during the year ended December 31, 2020, management considered historical and current collection performance,
uncertainty in economic forecasts in the geographies in which we operate, and believes that the operational disruption as a
result of the COVID-19 pandemic has, for the near term, been resolved through a combination of social distancing in the
workplace and working remotely. However, the macroeconomic driven consumer distress is still present and will likely
continue to impact the Company’s collections performance in the near future. As a result, the Company has updated its forecast,
resulting in a reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a
provision for credit loss adjustment of approximately $220.8 million during the year ended December 31, 2020. The
circumstances around this pandemic are evolving rapidly and will continue to impact the Company’s business and its estimation
of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its
assumptions accordingly.
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Accretable yield represented the amount of revenue on purchased receivable portfolios the Company expected to
recognize over the remaining life of its existing portfolios. The following table summarizes the change in accretable yield under
the previous accounting guidance during the period presented (in thousands):
Balance as of December 31, 2018
Revenue from receivable portfolios
Allowance on receivable portfolios, net
Additions on existing portfolios, net
Additions for current purchases, net
Effect of foreign currency translation
Balance as of December 31, 2019
$
$
4,026,206
(1,269,288)
8,108
524,964
1,081,774
77,307
4,449,071
The following table summarizes the change in the valuation allowance for investment in receivable portfolios as
accounted for under the previous accounting guidance during the period presented (in thousands):
Balance as of December 31, 2017
Provision for portfolio allowances
Reversal of prior allowances
Effect of foreign currency translation
Balance as of December 31, 2018
Provision for portfolio allowances
Reversal of prior allowances
Sale of Baycorp
Effect of foreign currency translation
Balance as of December 31, 2019
Note 5: Deferred Court Costs, Net
Valuation Allowance
$
$
102,576
14,421
(55,894)
(472)
60,631
36,806
(28,698)
(1,036)
1,776
69,479
As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies,”
effective January 1, 2020 and as part of the adoption of CECL, the Company changed its method of accounting for court costs
spent in its legal collection channel. The Company now expenses all of its court costs as incurred and includes all expected
recoveries, including the recoveries from the legal channel, in the measurement of the investment in receivable portfolios at a
discounted value. As a result, the Company no longer carries deferred court costs.
Net deferred court costs under the previous accounting method consisted of the following as of the date presented (in
thousands):
Court costs advanced
Court costs recovered
Court costs reserve
Deferred court costs, net
December 31,
2019
$
$
891,207
(369,043)
(421,992)
100,172
F-21
A roll-forward of the Company’s court cost reserve as accounted for under the previous accounting method is as follows
for the periods presented (in thousands):
Balance as of beginning of period
Provision for court costs
Charge-offs
Effect of foreign currency translation
Balance as of end of period
Year Ended December 31,
2019
2018
$
(396,460) $
(82,987)
60,618
(3,163)
(364,015)
(90,026)
53,383
4,198
$
(421,992) $
(396,460)
Note 6: Composition of Certain Financial Statement Items
Property and Equipment, Net
Property and equipment consist of the following as of the dates presented (in thousands):
Computer equipment and software
Leasehold improvements
Furniture, fixtures and equipment
Telecommunications equipment and other
Construction in process
Less: accumulated depreciation and amortization
December 31,
2020
December 31,
2019
$
$
194,678 $
43,621
10,514
3,450
4,739
257,002
(129,705)
127,297 $
167,045
39,542
10,428
3,156
2,089
222,260
(102,209)
120,051
Depreciation and amortization expense related to property and equipment was $34.8 million, $33.3 million, and $29.5
million during the years ended December 31, 2020, 2019, and 2018, respectively.
Other Assets
Other assets consist of the following as of the dates presented (in thousands):
Operating lease right-of-use assets
Identifiable intangible assets, net
Real estate owned
Income tax deposit
Deferred tax assets
Prepaid expenses
Service fee receivables
Other financial receivables
Other
Total
December 31,
2020
December 31,
2019
$
72,164 $
45,012
42,173
35,853
33,202
26,717
26,539
12,238
55,264
75,254
51,371
46,717
5,822
24,134
22,272
27,705
17,308
58,640
$
349,162 $
329,223
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Table of Contents
Note 7: Borrowings
The Company is in compliance in all material respects with all covenants under its financing arrangements as of
December 31, 2020. The components of the Company’s consolidated borrowings were as follows as of the dates presented (in
thousands):
December 31,
2020
December 31,
2019
Global senior secured revolving credit facility
$
481,007 $
Encore revolving credit facility
Encore term loan facility
Encore private placement notes
Senior secured notes
Convertible notes and exchangeable notes
Cabot senior revolving credit facility
Cabot securitisation senior facility
Other
Finance lease liabilities
Less: debt discount and issuance costs, net of amortization
Total
—
—
146,550
1,651,619
583,500
—
478,131
24,398
8,288
3,373,493
(91,859)
—
492,000
171,677
308,750
1,129,039
672,855
285,749
464,092
54,151
8,121
3,586,434
(73,237)
$
3,281,634 $
3,513,197
In September 2020 the Company entered into various transactions, agreements and amendments related to its borrowings
including (collectively, the “Financing Transactions”):
•
•
•
an amended multi-currency revolving credit facility that formerly supported only Cabot that now supports the
operations of all operating units;
an issuance of €350.0 million (approximately $410.8 million) in 4.875% senior secured notes due 2025; and
an amendment to the terms of the existing Senior Secured Notes (defined below).
Following the Financing Transactions, Encore is the parent of the restricted group for the Global Senior Facility, the
Senior Secured Notes and the Private Placement Notes, each of which is now guaranteed by the same group of material Encore
subsidiaries and secured by the same collateral, which represents substantially all of the assets of those subsidiaries.
In connection with the Financing Transactions, Encore repaid and terminated the Encore Senior Secured Credit Facilities
(defined below) and prepaid a portion of its Encore Private Placement Notes (defined below). The total fees paid to the lenders
and third-party costs incurred relating to the Financing Transactions were approximately $49.7 million, a portion of which were
capitalized as debt issuance costs. Additionally, certain of the unamortized debt issuance costs prior to the Financing
Transaction were written-off. The Company recorded a pre-tax expense of approximately $24.6 million (approximately
$18.9 million net of tax) relating to the Financing Transactions, $15.0 million of which was included in loss on extinguishment
of debt, $2.7 million was included in interest expense, and $6.9 million was included in general and administrative expense in
the Company’s consolidated statements of operations during the year ended December 31, 2020.
Global Senior Secured Revolving Credit Facility
The Company has entered into a multi-currency senior secured revolving credit facility agreement (as amended and
restated, the “Global Senior Facility”). In previous periods, the Company referred to this facility as the Cabot Credit Facility. As
of December 31, 2020, the Global Senior Facility provided for a total committed facility of $1,050.0 million that matures in
September 2024 and included the following key provisions:
•
•
•
Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 2.50% per annum, with a LIBOR (or EURIBOR)
floor of 0.75%;
A restrictive covenant that limits the LTV Ratio (defined in the Global Senior Facility) to 0.75 in the event that the
Global Senior Facility is more than 20% utilized;
A restrictive covenant that limits the SSRCF Ratio (defined in the Global Senior Facility) to 0.275;
F-23
Table of Contents
•
•
•
A restrictive covenant that requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the
Global Senior Facility) of at least 2.0;
Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence
of additional indebtedness and liens; and
Standard events of default which, upon occurrence, may permit the lenders to terminate the Global Senior Facility
and declare all amounts outstanding to be immediately due and payable.
The Global Senior Facility is secured by substantially all of the assets of the Company and the guarantors. Pursuant to the
terms of an intercreditor agreement entered into with respect to the relative positions of (1) the Global Senior Facility, any super
priority hedging liabilities and the Encore Private Placement Notes (collectively, “Super Senior Liabilities”) and (2) the Senior
Secured Notes, Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority
with respect to any proceeds received upon any enforcement action over any such assets.
As of December 31, 2020, the outstanding borrowings under the Global Senior Facility were $481.0 million. Since the
completion of the Financing Transactions, the weighted average interest rate of the Global Senior Facility was 3.25%. The
weighted average interest rate of the previous Cabot Credit Facility was 3.30% and 3.52% for the years ended December 31,
2020 and December 31, 2019, respectively. The weighted average interest rate of the previous Encore Revolving Credit Facility
was 3.90% and 5.27% for the years ended December 31, 2020 and December 31, 2019, respectively. Available capacity under
the Global Senior Facility was $569.0 million as of December 31, 2020.
Encore Revolving Credit Facility and Term Loan Facility
The Company had a revolving credit facility (the “Revolving Credit Facility”) and term loan facility (the “Term Loan
Facility,” and together with the Revolving Credit Facility, the “Encore Senior Secured Credit Facilities”) pursuant to a Third
Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”) that was
previously used to support the Company’s domestic operations. In connection with the Financing Transactions on September
24, 2020, the Company repaid the Encore Senior Secured Credit Facilities and terminated the Restated Credit Agreement.
Encore Private Placement Notes
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the
“Encore Private Placement Notes”). In September 2020, as part of the Financing Transactions, the Company prepaid
approximately $103.7 million of the Encore Private Placement Notes and made a $10.4 million make-whole payment to the
holders of notes that were prepaid. The make-whole payment was included in loss on extinguishment of debt in the Company’s
consolidated statements of operations during the year ended December 31, 2020. As of December 31, 2020, $146.6 million of
the Encore Private Placement Notes remained outstanding. The Encore Private Placement Notes bear an annual interest rate of
5.625%, mature in August 2024 and require quarterly principal payments of $9.8 million. The covenants and material terms for
the Encore Private Placement Notes are substantially similar to those for the Global Senior Facility.
Senior Secured Notes
The following table provides a summary of the Senior Secured Notes ($ in thousands):
Cabot 2023 Notes
Cabot 2024 Floating Rate Notes
Encore 2025 Notes
Encore 2026 Notes
Encore 2028 Floating Rate Notes
December 31, 2020 December 31, 2019
Maturity Date
Interest Rate
$
309,034 $
—
426,752
409,827
506,006
680,118
448,921
Oct 1, 2023
7.500 %
Jun 1, 2024 EURIBOR +6.375%
—
—
—
Oct 15, 2025
Feb 15, 2026
4.875 %
5.375 %
Jan 15, 2028 EURIBOR +4.250%
$
1,651,619 $
1,129,039
In September 2020, as part of the Financing Transactions, Encore issued €350.0 million (approximately $426.8 million
based on an exchange rate of $1.00 to €0.82, the exchange rate as of December 31, 2020) in aggregate principal amount of
4.875% Senior Secured Notes due 2025 at an issue price of 98.889% (the “Encore 2025 Notes”). Interest on the Encore 2025
Notes is payable semi-annually, in arrears, on April 15 and October 15 of each year, commencing on April 15, 2021.
In November 2020, Encore issued £300.0 million (approximately $409.8 million based on an exchange rate of $1.00 to
£0.73, the exchange rate as of December 31, 2020) in aggregate principal amount of 5.375% Senior Secured Notes due 2026 at
an issue price of 100.000% (the “Encore 2026 Notes”). Interest on the Encore 2026 Notes is payable semi-annually, in arrears,
on February 15 and August 15 of each year, commencing on February 15, 2021. The Company used the proceeds from this
F-24
Table of Contents
offering to redeem £286.7 million (approximately $391.7 million based on an exchange rate of $1.00 to £0.73, the exchange
rate as of December 31, 2020) of the outstanding £512.9 million (approximately $700.7 million based on an exchange rate of
$1.00 to £0.73, the exchange rate as of December 31, 2020) aggregate principal amount of 7.500% Senior Secured Notes due
2023 (the “Cabot 2023 Notes”) at a redemption price of 101.875%, and pay certain transaction fees and expenses incurred in
connection with this offering. The Company recognized a loss on extinguishment of debt of approximately $12.8 million
(approximately $10.3 million net of tax) associated with this transaction during the year ended December 31, 2020. As of
December 31, 2020, £226.2 million (approximately $309.0 million based on an exchange rate of $1.00 to £0.73, the exchange
rate as of December 31, 2020) of the Cabot 2023 Notes were outstanding, interest is payable semi-annually, in arrears, on April
1 and October 1 of each year.
In December 2020, Encore issued €415.0 million (approximately $506.0 million based on an exchange rate of $1.00 to
€0.82, the exchange rate as of December 31, 2020) in aggregate principal amount of senior secured floating rate notes due 2028
at an issue price of 99.000% (the “Encore 2028 Floating Rate Notes” and together with the Cabot 2023 Notes, Encore 2025
Notes and Encore 2026 Notes, the “Senior Secured Notes”). The Encore 2028 Floating Rate Notes bear interest at a rate equal
to the sum of (i) three-month EURIBOR (subject to a 0% floor) plus (ii) 4.250% per annum, reset quarterly. Interest is payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on April 15, 2021. The
Company used the proceeds from this offering to redeem the outstanding €400.0 million (approximately $487.7 million based
on an exchange rate of $1.00 to €0.82, the exchange rate as of December 31, 2020) aggregate principal amount Senior Secured
Floating Rate Notes due 2024 (the “Cabot 2024 Floating Rate Notes”) in full and pay certain transaction fees and expenses
incurred in connection with this offering. The Company recognized a loss on extinguishment of debt of approximately
$13.1 million (approximately $10.6 million net of tax) associated with this transaction during the year ended December 31,
2020. The Cabot 2024 Floating Rate Notes bore interest at a rate equal to the sum of (i) three-month EURIBOR (subject to a
0% floor) plus (ii) 6.375%, reset quarterly.
The Senior Secured Notes are secured by the same collateral as the Global Senior Facility and the Encore Private
Placement Notes. The guarantees provided in respect of the Senior Secured Notes are pari passu with each such guarantee given
in respect of the Global Senior Facility and Encore Private Placement Notes. Subject to the intercreditor agreement described
above under “Global Senior Secured Revolving Credit Facility,” Super Senior Liabilities that are secured by assets that also
secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over
any such assets.
Convertible Notes and Exchangeable Notes
The following table provides a summary of the principal balance, maturity date and interest rate for the outstanding
convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ($ in thousands):
2020 Convertible Notes (1)
2021 Convertible Notes
2022 Convertible Notes
2023 Exchangeable Notes
2025 Convertible Notes
_______________________
December 31, 2020 December 31, 2019
Maturity Date
Interest Rate
$
— $
161,000
150,000
172,500
100,000
$
583,500 $
89,355
161,000
150,000
172,500
100,000
672,855
Jul 1, 2020
Mar 15, 2021
Mar 15, 2022
Sep 1, 2023
Oct 1, 2025
3.000 %
2.875 %
3.250 %
4.500 %
3.250 %
(1) The 2020 Convertible Notes matured on July 1, 2020 and the Company repaid the outstanding principal in cash.
The Exchangeable Notes were issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned
finance subsidiary of Encore, and are fully and unconditionally guaranteed by Encore. Unless otherwise indicated in connection
with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by
Encore Finance. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent
to April 30, 2018, the date of incorporation of Encore Finance.
Prior to the close of business on the business day immediately preceding their respective free conversion or exchange date
(listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances set
forth in the applicable indentures. On or after their respective free conversion or exchange dates until the close of business on
the second scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their
notes at any time. Certain key terms related to the convertible and exchangeable features as of December 31, 2020 are listed
below:
F-25
Table of Contents
2021 Convertible
Notes
2022 Convertible
Notes
2023 Exchangeable
Notes
2025 Convertible
Notes
Initial conversion or exchange price
Closing stock price at date of issuance
$
$
59.39 $
47.51 $
45.57 $
35.05 $
44.62 $
36.45 $
40.00
32.00
Closing stock price date
Conversion or exchange rate (shares per $1,000
principal amount)
Mar 5, 2014
Feb 27, 2017
Jul 20, 2018
Sep 4, 2019
16.8386
21.9467
22.4090
25.0000
Conversion or exchange date
Sep 15, 2020
Sep 15, 2021
Mar 1, 2023
Jul 1, 2025
Prior to October 29, 2020, in the event of conversion or exchange, holders of the Company’s Convertible Notes or
Exchangeable Notes would receive cash, shares of the Company’s common stock or a combination of cash and shares of the
Company’s common stock, at the Company’s election. The Company’s intent was to settle conversions and exchanges through
combination settlement with a minimum specified dollar amount of $1,000 per $1,000 principal amount of notes (i.e.,
convertible or exchangeable into cash up to the aggregate principal amount, and shares of the Company’s common stock or a
combination of cash and shares of the Company’s common stock, at the Company’s election and subject to certain restrictions
contained in each of the indentures governing the Convertible Notes and Exchangeable Notes, for the remainder). As a result,
only the conversion or exchange spread was included in the diluted earnings per share calculation, if dilutive. Under such
method, the settlement of the conversion or exchange spread had a dilutive effect when, during any quarter, the average share
price of the Company’s common stock exceeds the initial conversion or exchange prices listed in the above table.
On October 29, 2020, the Company entered into supplemental indentures for the Convertible Notes and Exchangeable
Notes so that in the event of conversion or exchange, the notes are convertible or exchangeable into cash up to the aggregate
principal amount of the notes and the excess conversion premium, if any, may be settled in cash or shares of the Company’s
common stock at the Company’s election and subject to certain restrictions contained in each of the indentures governing the
Convertible Notes and Exchangeable Notes. Only the conversion or exchange spread is included in the diluted earnings per
share calculation, if dilutive. There was no dilutive effect relating to our convertible or exchangeable notes during the years
ended December 31, 2020, 2019, or 2018.
The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the
effective interest rate for each of the Convertible Notes and Exchangeable Notes at the time of the original offering are listed
below (in thousands, except percentages):
Debt component
Equity component
Equity issuance cost
Stated interest rate
Effective interest rate
2021 Convertible
Notes
2022 Convertible
Notes
2023
Exchangeable
Notes
2025 Convertible
Notes
$
$
$
$
$
$
143,645
17,355
581
2.875 %
4.700 %
$
$
$
137,266
12,734
398
3.250 %
5.200 %
$
$
$
157,971
14,009
—
4.500 %
6.500 %
91,024
8,976
224
3.250 %
5.000 %
The balances of the liability and equity components of all the Convertible Notes and Exchangeable Notes outstanding
were as follows (in thousands):
Liability component—principal amount
Unamortized debt discount
Liability component—net carrying amount
Equity component
December 31,
2020
December 31,
2019
$
$
$
583,500 $
(19,364)
564,136 $
53,074 $
672,855
(30,308)
642,547
83,127
The debt discount is being amortized into interest expense over the remaining life of the Convertible Notes and
Exchangeable Notes using the effective interest rates. Interest expense related to the Convertible Notes and Exchangeable Notes
was as follows during the periods presented (in thousands):
F-26
Table of Contents
Interest expense—stated coupon rate
Interest expense—amortization of debt discount
Interest expense—Convertible Notes and Exchangeable Notes
Hedge Transactions
Year ended December 31,
2020
2019
2018
$
$
21,857 $
10,945
32,802 $
23,845 $
12,780
36,625 $
17,518
10,888
28,406
In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be
required to make in the event that the market price of the Company’s common stock becomes greater than the conversion or
exchange prices of the Convertible Notes and the Exchangeable Notes, the Company maintains a hedge program that increases
the effective conversion or exchange price for the 2021 Convertible Notes and the Exchangeable Notes. All of the hedge
instruments related to the Convertible Notes and the Exchangeable Notes have been determined to be indexed to the Company’s
own stock and meet the criteria for equity classification. The Company recorded the cost of the hedge instruments as a
reduction in additional paid-in capital, and does not recognize subsequent changes in fair value of these financial instruments in
its consolidated financial statements. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes.
The details of the hedge program are listed below (in thousands, except conversion or exchange price):
Cost of the hedge transaction(s)
Initial conversion or exchange price
Effective conversion or exchange price
Cabot Securitisation Senior Facility
2021 Convertible
Notes
2023 Exchangeable
Notes
$
$
$
19,545 $
59.39 $
83.14 $
17,785
44.62
62.48
Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, has a senior facility for a
committed amount of £350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior
Facility matures in March 2025. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum
equal to SONIA plus a margin of 3.06% plus, for periods after March 15, 2023, a step-up margin ranging from zero to 1.00%.
As of December 31, 2020, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million
(approximately $478.1 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020). The
obligations of Cabot Securitisation under the Cabot Securitisation Senior Facility are secured by first ranking security interests
over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from
time to time), the book value of which was approximately £397.7 million (approximately $543.3 million based on an exchange
rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) as of December 31, 2020. The weighted average interest rate
was 3.23% and 3.74% for the years ended December 31, 2020 and 2019, respectively.
Cabot Securitisation and Cabot Securitisation II are securitized financing vehicles and are VIEs for consolidation
purposes. Refer to “Note 8: Variable Interest Entities” for further details.
Finance Lease Liabilities
The Company has finance lease liabilities primarily for computer equipment. As of December 31, 2020, the Company’s
finance lease liabilities were approximately $8.3 million. Refer to “Note 11: Leases” for further details.
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Table of Contents
Maturity Schedule
The aggregate amounts of the Company’s borrowings, maturing in each of the next five years and thereafter are as follows
(in thousands):
2021
2022
2023
2024
2025
Thereafter
Total
$
$
211,499
198,573
526,502
511,963
1,008,727
916,229
3,373,493
Note 8: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of
the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb
expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the
variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s
economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could
potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary.
As of December 31, 2020, the Company’s VIEs include certain securitized financing vehicles and other immaterial special
purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary
beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs which includes but is not limited to
the ability to exercise discretion in the servicing of the financial assets. The Company evaluates its relationships with its VIEs
on an ongoing basis to ensure that it continues to be the primary beneficiary.
Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to
satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs
do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of
the VIE.
Note 9: Stock-Based Compensation
In April 2017, Encore’s Board of Directors (the “Board”) approved the Encore Capital Group, Inc. 2017 Incentive Award
Plan (the “2017 Plan”), which was then approved by the Company’s stockholders on June 15, 2017. The 2017 Plan superseded
the Company’s 2013 Incentive Compensation Plan (as amended, the “2013 Plan”), which had previously superseded the
Company’s 2005 Stock Incentive Plan (“2005 Plan”). Board members, employees, and consultants of Encore and its
subsidiaries and affiliates are eligible to receive awards under the 2017 Plan. Subject to certain adjustments, the Company may
grant awards for an aggregate of 5,713,571 shares of the Company’s common stock under the 2017 Plan. The aggregate number
of shares available for issuance under the 2017 Plan will be reduced by 2.12 shares for each share delivered in settlement of any
full value award and by one share for each share delivered in settlement of any stock option or stock appreciation right. If an
award under the 2017 Plan or the 2013 Plan expires, lapses or is terminated, exchanged for cash, surrendered, repurchased,
canceled without having been fully exercised or forfeited, the unused shares covered by such award will again become or again
be available for award grants under the 2017 Plan. Shares available under the 2017 Plan will be increased by 2.12 shares for
each share subject to a full value award and by one share for each share subject to a stock option or a stock appreciation right, in
each case, that become or again be available for issuance pursuant to the foregoing share counting provisions.
The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted
stock units, dividend equivalent rights, stock appreciation rights, cash awards, performance-based awards and any other types of
awards not inconsistent with the 2017 Plan.
Total stock-based compensation expense during the years ended December 31, 2020, 2019, and 2018 was $16.6 million,
$12.6 million, and $13.0 million, respectively. The actual tax benefit from stock-based compensation arrangements totaled $2.5
million, $1.2 million, and $1.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company’s stock-based compensation arrangements are described below:
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Table of Contents
Stock Options
Under the 2005 Plan, option awards were generally granted with an exercise price equal to the market price of the
Company’s stock at the date of issuance. They generally vest over three to five years of continuous service, and have ten-year
contractual terms. Other than the Performance Options discussed below, no options have been awarded under the 2013 Plan or
2017 Plan.
There were no options granted during the years ended December 31, 2020, 2019, or 2018. As of December 31, 2020, all
outstanding stock options have been fully vested and all related compensation expense has been fully recognized.
A summary of the Company’s stock option activity as of December 31, 2020, and changes during the year then ended, are
presented below:
Outstanding as of December 31, 2019
Outstanding as of December 31, 2020
Exercisable as of December 31, 2020
Number of
Shares
Weighted Average
Exercise Price
9,166 $
9,166 $
9,166 $
22.17
22.17
22.17
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
1.26 $
1.26 $
154
154
The total intrinsic value of options exercised during the years ended December 31, 2019 and 2018 was $1.0 million and
$0.4 million, respectively. Cash received from option exercise under all share-based payment arrangements during the years
ended December 31, 2019 and 2018, was $0.3 million and $0.7 million, respectively. There were no options exercised during
the year ended December 31, 2020.
Performance Stock Options
Under the 2017 Plan and the 2013 Plan, the Company granted performance stock options, with an exercise price equal to
the closing price of the Company’s stock at the date of issuance, that vest in equal annual installments over a three year service
period but only if, within four years from the date of grant, the 20 trading day average of the closing price of the Company’s
stock (subject to dividend-related adjustments) exceeds a target equal to a 25% increase from the closing price on the date of
grant. These performance options have a seven-year contractual life.
A summary of the Company’s performance stock option activity as of December 31, 2020, and changes during the year
then ended, are presented below:
Outstanding as of December 31, 2019
Outstanding as of December 31, 2020
Vested as of December 31, 2020
Exercisable as of December 31, 2020
Number of
Shares
Weighted Average
Exercise Price
164,013 $
164,013 $
150,697 $
150,697 $
31.73
31.73
30.95
30.95
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
3.21 $
3.19 $
3.19 $
1,206
1,206
1,206
As of December 31, 2020, all related compensation expense has been fully recognized. No performance stock options
were granted during the years ended December 31, 2020, 2019, and 2018.
Non-Vested Shares
The Company’s 2017 Plan (and previously, the 2013 Plan and 2005 Plan), permits restricted stock units, restricted stock
awards, performance stock units, and performance stock awards (collectively “stock awards”). The fair value of non-vested
shares with a service condition and/or a performance condition that affect vesting is equal to the closing sale price of the
Company’s common stock on the grant date. Compensation expense is recognized only for the awards that ultimately vest. The
Company has certain share awards that include market conditions that affect vesting. These shares vest based on the Company’s
three-year relative total stockholder return compared to the other companies in the S&P SmallCap 600 Financial Sector Index
as of the date of grant. The fair value of these shares is estimated using a lattice model. For the majority of non-vested shares,
F-29
Table of Contents
shares are issued on the vesting dates net of the number of shares needed to satisfy minimal statutory tax withholding
requirements. The tax obligations are then paid by the Company on behalf of the employees.
A summary of the Company’s stock award activities as of December 31, 2020, and changes during the year then ended, is
presented below:
Non-vested as of December 31, 2019
Awarded
Vested
Cancelled
Non-vested as of December 31, 2020
________________________
Non-Vested
Shares (1)
Weighted Average
Grant Date
Fair Value
922,530 $
443,101 $
(389,484) $
(33,629) $
942,518 $
33.11
38.51
35.45
39.68
35.29
(1) Certain of the Company’s stock awards have a vesting matrix under which the stock awards can vest at a maximum level that is 200% of the shares that
would vest for achieving the performance goals at target. The number of shares presented is based on achieving the performance goals at target levels as
defined in the stock award agreements. As of December 31, 2020 and 2019, the maximum number of non-vested performance shares that could vest
under the provisions of the agreements was 1,255,445 and 1,171,334, respectively.
Unrecognized compensation expense related to non-vested shares as of December 31, 2020 was $15.4 million. The
weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was
approximately 1.2 years. The fair value of restricted stock units and restricted stock awards vested for the years ended
December 31, 2020, 2019, and 2018 was $14.5 million, $8.9 million, and $8.8 million, respectively. The weighted average
grant date fair value for stock awards granted during the years ended December 31, 2020, 2019, and 2018 was $38.51, $32.42,
and $38.52, respectively.
Note 10: Income Taxes
Income before provision for income taxes consisted of the following (in thousands):
US
Foreign
Total income before provision for income taxes
Year Ended December 31,
2020
2019
2018
$
$
259,132 $
144,495 $
23,766
56,747
282,898 $
201,242 $
61,972
94,516
156,488
The provision for income tax on earnings from continuing operations consisted of the following (in thousands):
Current expense (benefit):
Federal
State
Foreign
Deferred expense (benefit):
Federal
State
Foreign
Provision for income taxes
Year Ended December 31,
2020
2019
2018
43,185 $
8,528
10,112
61,825
15,851
2,192
(9,494)
8,549
70,374 $
(2,917) $
(6,464)
21,008
11,627
27,640
5,535
(12,469)
20,706
32,333 $
23,254
2,983
29,532
55,769
(10,447)
(2,169)
3,599
(9,017)
46,752
$
$
F-30
Table of Contents
The reconciliation of federal statutory income tax rate to our effective tax rate was as follows:
Federal provision
State provision
Foreign rate differential(1)
Change in valuation allowance(2)
IRS settlement(3)
Tax effect of CFPB settlement fees(4)
Other
Effective rate
________________________
Year Ended December 31,
2020
2019
2018
21.0 %
3.2 %
(0.5) %
0.9 %
— %
1.1 %
(0.8) %
24.9 %
21.0 %
0.2 %
(2.2) %
(0.5) %
(2.4) %
— %
— %
16.1 %
21.0 %
0.1 %
(11.7) %
17.7 %
— %
— %
2.8 %
29.9 %
(1) Relates primarily to lower tax rates on income or loss attributable to international operations.
(2)
(3)
In 2018, valuation allowance net increase recorded as a result of certain foreign subsidiaries' cumulative operating losses for tax purposes.
In 2019, relates to tax benefit resulting from tax accounting method change.
(4) Non-deductible expense for tax purposes. Refer to “Note 12: Commitments and Contingencies” for details of the CFPB settlement.
The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026. The impact
of the tax holiday in Costa Rica for the year ended December 31, 2020 was immaterial.
The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing
operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as
of December 31, 2020, were approximately $71.3 million. Such undistributed earnings are considered permanently reinvested.
The Company does not provide deferred taxes on translation adjustments of unremitted earnings under the indefinite
reinvestment exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not
practical due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States for which the
Company does not consider under the indefinite reinvestment exemption have no material undistributed earnings or outside
basis differences.
F-31
Table of Contents
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the carrying amounts for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Net operating losses
Operating lease liabilities
Accrued expenses
Difference in basis of bond and loan costs
Stock-based compensation
Other
Total deferred tax assets
Valuation allowance
Total deferred tax assets net of valuation allowance
Deferred tax liabilities:
Deferred court cost
Difference in basis of receivable portfolio
Right-of-use asset
Difference in basis of depreciable and amortizable assets
Prepaid expenses
Other
Total deferred tax liabilities
Net deferred tax liability(1)
________________________
December 31,
2020
December 31,
2019
$
43,307 $
12,583
12,862
1,267
2,787
5,596
78,402
(38,463)
39,939
—
(20,806)
(8,525)
(13,863)
(793)
(1,682)
(45,669)
$
(5,730) $
36,236
18,023
10,050
4,194
2,882
1,822
73,207
(36,422)
36,785
(23,682)
(57)
(14,422)
(3,680)
(628)
(4,559)
(47,028)
(10,243)
(1) The Company operates in multiple jurisdictions. Deferred tax assets and liabilities are netted for each tax-paying component of the Company within a
particular tax jurisdiction and presented as a single amount in the statement of financial condition.
As of December 31, 2020, certain of the Company’s foreign subsidiaries have net operating loss carry forwards of
approximately $155.3 million, which will begin to expire in 2024. Certain of the Company’s domestic subsidiaries have state
net operating losses which the Company expects to fully utilize upon filing the 2020 income tax returns.
Valuation allowances are recorded against deferred tax assets, including certain net operating losses recorded as deferred
tax assets, if the Company believes that it is more likely than not that some or all of the deferred tax assets will not be realized.
As of December 31, 2020, valuation allowances increased to $38.5 million, as compared to $36.4 million as of December 31,
2019. The increase was primarily related to current period losses at certain foreign entities with cumulative operating losses
during the period ended December 31, 2020.
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Table of Contents
A reconciliation of the beginning and ending amounts of unrecognized tax benefit is as follows (in thousands):
Balance as of December 31, 2017
Increases related to prior year tax positions
Increases related to current year tax positions
Decrease related to expiration of statute of limitations
Decreases related to settlements with taxing authorities
Balance as of December 31, 2018
Decreases related to prior year tax positions
Increases related to current year tax positions
Decrease related to expiration of statute of limitations
Decreases related to settlements with taxing authorities
Balance as of December 31, 2019
Decrease related to prior year tax positions
Increases related to prior year tax positions
Increases related to current year tax positions
Decrease related to expiration of statute of limitations
Decreases related to settlements with taxing authorities
Balance as of December 31, 2020
Amount
20,020
256
1,958
(3,221)
(461)
18,552
(10,673)
4,442
(2,493)
(1,920)
7,908
(608)
6
574
(827)
(272)
6,781
$
$
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $6.9 million, $8.2 million and
$19.9 million as of December 31, 2020, 2019, and 2018 respectively. As of December 31, 2020, 2019 and 2018, there was $6.5
million, $7.6 million and $13.0 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax
benefit. During the year ended December 31, 2020, the decrease in the Company’s gross unrecognized tax benefit was
primarily related to the expiration of state statute of limitations. During the year ended December 31, 2019, the decrease in the
Company's gross unrecognized tax benefit was primarily related to decreases in prior year tax positions from exam resolutions.
During the year ended December 31, 2018, the decrease in the Company’s gross unrecognized tax benefit was primarily related
to expiration of state statute of limitations.
The Company believes that an adequate provision has been made for any adjustments that may result from tax
examinations. However, it is reasonably possible that certain changes may occur within the next 12 months, which could
significantly increase or decrease the balance of the Company’s gross unrecognized tax benefits.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of tax expense. The
Company recognized expense of $0.2 million, benefit of $2.7 million and expense of $0.6 million in interest and penalties
during the years ended December 31, 2020, 2019 and 2018, respectively. Interest and penalties accrued as of December 31,
2020 and 2019 were $0.2 million and $0.3 million, respectively.
The Company files federal, state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations.
The Company is no longer subject to federal tax examinations for years prior to 2018. For U.S. state tax returns, the Company
is generally not subject to tax examinations prior to 2013. The Company is subject to the examination of its income tax returns
by various taxing authorities, and the timing of the resolution of income tax examinations cannot be predicted with certainty.
The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax
examinations are resolved in a manner not consistent with management's expectations, the Company could be required to adjust
its provision for income taxes in the period such resolution occurs.
Note 11: Leases
The majority of the Company’s leases are for corporate offices, various facilities, and information technology equipment.
The Company elected not to apply the recognition requirements to short-term leases and not to separate non-lease components
from lease components.
The Company recognizes operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated
statements of financial condition. ROU assets represent the Company’s right to use an underlying asset during the lease term
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and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease
liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The
Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that
option. ROU assets also include any advance lease payments made and are net of any lease incentives. As most of the
Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. The incremental borrowing
rate is the rate of interest that the Company would expect to pay to borrow over a similar term, and on a collateralized basis, an
amount equal to the lease payments in a similar economic environment.
The components of lease expense were as follows during the periods presented (in thousands):
Operating lease costs(1)
Finance lease costs
Amortization of ROU assets
Interest on lease liabilities
Total lease costs
________________________
Year Ended December 31,
2020
2019
16,331 $
19,450
3,149
420
19,900 $
1,825
563
21,838
$
$
(1) Operating lease expenses are included in general and administrative expenses in the Company’s consolidated statements of operations. Costs include
short-term and variable lease components which were not material for the periods presented.
The following table provides supplemental consolidated statement of financial condition information related to leases as
of the dates presented (in thousands):
Assets
Operating lease ROU assets
Finance lease ROU assets
Total lease ROU assets
Liabilities
Operating lease liabilities
Finance lease liabilities
Total lease liabilities
Classification
December 31, 2020
December 31, 2019
Other assets
Property and equipment, net
Other liabilities
Borrowings
$
$
$
$
72,164 $
12,410
84,574 $
75,254
9,133
84,387
90,659 $
8,288
98,947 $
93,847
8,121
101,968
Supplemental lease information is summarized below (in thousands, except rate and lease term):
ROU assets obtained in exchange for new operating lease obligations(1)
ROU assets obtained in exchange for new finance lease obligations
Cash paid for amounts included in the measurement of lease liabilities
Operating leases - operating cash flows
Finance leases - operating cash flows
Finance leases - financing cash flows
________________________
Year Ended December 31,
2020
2019
$
8,990 $
3,276
123,477
5,299
17,396
419
3,114
14,874
295
1,898
(1) During the year ended December 31, 2019, the amount includes $89.1 million for operating leases existing as of January 1, 2019.
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Weighted-average remaining lease term (in years)
Operating leases
Finance leases
Weighted-average discount rate
Operating leases(1)
Finance leases
________________________
December 31, 2020
December 31, 2019
7.1
2.5
5.0 %
4.6 %
8.1
3.1
5.3 %
4.7 %
(1) Upon adoption of the new lease standard, discount rates used for existing operating leases were established at January 1, 2019.
Maturities of lease liabilities under non-cancelable leases as of December 31, 2020 are summarized as follows (in
thousands):
2021
2022
2023
2024
2025
Thereafter
Total undiscounted lease payments
Less: imputed interest
Total lease liabilities
Note 12: Commitments and Contingencies
Litigation and Regulatory
Finance Leases
Operating Leases
Total
$
3,674 $
19,440 $
3,410
1,467
241
—
—
8,792
(504)
8,288 $
15,872
14,311
14,474
11,612
37,776
113,485
(22,826)
90,659 $
$
23,114
19,282
15,778
14,715
11,612
37,776
122,277
(23,330)
98,947
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to
time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions
based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act
(“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or
alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to
collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its
collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory
actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in
business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and
other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance
or timing of any eventual outcome.
In September 2015, the Company entered into a consent order (the “2015 Consent Order”) with the Consumer Financial
Protection Bureau (the “CFPB”) in which the Company settled allegations arising from its practices between 2011 and 2015.
On September 8, 2020, a suit captioned Bureau of Consumer Financial Protection v. Encore Capital Group, Inc. et al. was filed
in the United States District Court for the Southern District of California. In the suit, the CFPB alleged that the Company did
not perfectly adhere to certain operational provisions of the 2015 Consent Order, leading to alleged violations of federal
consumer financial law. On October 15, 2020, the parties entered into a stipulated judgment (“Stipulated Judgment”) to resolve
the lawsuit. The Stipulated Judgment includes obligations on the Company to, among other things: (1) continue to follow a
narrow subset of the operational requirements contained in the 2015 Consent Order, all of which have long been part of the
Company’s routine practices; (2) pay a $15.0 million civil monetary penalty; and (3) provide redress of approximately $9,000
to 14 affected consumers, which is in addition to approximately $70,000 of redress that the Company had previously voluntarily
provided. Under the Stipulated Judgment, the Company neither admits nor denies the allegations in the CFPB’s suit. In
connection with the Stipulated Judgment the CFPB has formally terminated the 2015 Consent Order. As a result of the
Stipulated Judgment the Company recorded an after-tax charge of $15.0 million, which is included in the general and
administration expenses in its consolidated statements of operations for the year ended December 31, 2020 .
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Additionally, we are subject to ancillary state Attorney General investigations related to similar debt collection practices.
In 2018, we entered into settlement agreements with the Attorneys General of 42 U.S. states and the District of Columbia in
connection with our debt collection and litigation practices. The Company has discussed with additional state attorneys general
potential resolution of these investigations, which could include penalties, restitution, and/or the adoption of new operational
requirements. If the Company is unable to resolve its differences with the state attorneys general, it is possible that they may file
claims against the Company.
In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover
all or portions of its litigation expenses, judgments, or settlements. The Company records loss contingencies in its financial
statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be
reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company
continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when
additional information becomes available. The Company’s legal costs are recorded to expense as incurred.
As of December 31, 2020, the Company has no material reserves for legal matters.
Purchase Commitments
In the normal course of business, the Company enters into forward flow purchase agreements. A forward flow purchase
agreement is a commitment to purchase receivables over a duration that is typically three to twelve months, but can be longer,
generally with a specifically defined volume range, frequency, and pricing. Typically, these forward flow contracts have
provisions that allow for early termination or price re-negotiation should the underlying quality of the portfolio deteriorate over
time or if any particular month’s delivery is materially different than the original portfolio used to price the forward flow
contract. Certain of these forward flow purchase agreements may also have termination clauses, whereby the agreements can be
canceled by either party upon providing a certain specified amount of notice.
As of December 31, 2020, the Company had entered into forward flow purchase agreements for the purchase of
nonperforming loans with an estimated minimum aggregate purchase price of approximately $157.4 million. We expect actual
purchases under these forward flow purchase agreements to be significantly greater than the estimated minimum aggregate
purchase price.
Employee Savings and Retirement Plan
The Company has a 401(k) Savings Plan that qualifies as deferred salary arrangements under Section 401(k) of the
Internal Revenue Code. Under the 401(k) Plan, matching contributions are based upon the amount of the employees’
contributions subject to certain limitations. The Company recognized expense of approximately $2.9 million, $2.8 million, and
$2.5 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Guarantees
Encore’s Certificate of Incorporation and indemnification agreements between the Company and its officers and directors
provide that the Company will indemnify and hold harmless its officers and directors for certain events or occurrences arising
as a result of the officer or director serving in such capacity. The Company has also agreed to indemnify certain third parties
under certain circumstances pursuant to the terms of certain underwriting agreements, registration rights agreements, credit
facilities, portfolio purchase and sale agreements, and other agreements entered into by the Company in the ordinary course of
business. The maximum potential amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is
minimal and, as of December 31, 2020, has no liabilities recorded for these agreements.
Note 13: Segment and Geographic Information
The Company conducts business through several operating segments. The Company’s management relies on internal
management reporting processes that provide segment revenue, segment operating income, and segment asset information in
order to make financial decisions and allocate resources. The Company determined its operating segments meet the aggregation
criteria, and therefore, it has one reportable segment, portfolio purchasing and recovery, based on similarities among the
operating units including economic characteristics, the nature of the services, the nature of the production process, customer
types for their services, the methods used to provide their services and the nature of the regulatory environment.
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The following tables present information about geographic areas in which the Company operates (in thousands):
Total revenues(1):
United States
International
Europe(2)
Other geographies
Total
________________________
Year Ended December 31,
2020
2019
2018
$
992,916 $
817,693 $
709,493
490,385
18,099
1,501,400 $
520,433
59,555
1,397,681 $
556,265
96,272
1,362,030
$
(1) Total revenues for periods in 2019 and 2018 are adjusted by net allowances. Total revenues are attributed to countries based on consumer location.
(2) Based on the financial information that is used to produce the general-purpose financial statements, providing further geographic information is
impracticable.
Long-lived assets(1):
United States
International
United Kingdom
Other foreign countries
Total
________________________
December 31,
2020
December 31,
2019
$
83,523 $
84,118
37,225
6,549
43,774
28,602
7,331
35,933
$
127,297 $
120,051
(1) Long-lived assets consist of property and equipment, net and finance leases.
Note 14: Goodwill and Identifiable Intangible Assets
The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment.
Goodwill is tested for impairment at the reporting unit level annually and in interim periods if certain events occur that indicate
that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair
value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and
assumptions. The Company performs its annual goodwill impairment assessment as of October 1. As of October 1, 2020, the
Company had two reporting units, MCM and Cabot, that carried goodwill.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill
impairment test. The qualitative factors include economic environment, business climate, market capitalization, operating
performance, competition, and other factors. The Company may proceed directly to the quantitative test without performing the
qualitative test. For the goodwill impairment tests performed as of October 1, 2020, the Company updated its consideration of
the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each
of the reporting units. The Company performed qualitative analysis for the MCM reporting unit and proceeded directly to the
quantitative test for its Cabot reporting unit.
If goodwill is quantitatively assessed for impairment and a reporting unit’s carrying value exceeds its fair value, the
difference is recorded as an impairment. The Company applies various valuation techniques to measure the fair value of each
reporting unit, including the income approach and the market approach. For goodwill impairment analyses, the Company uses
the income approach in determining fair value, specifically the discounted cash flow method, or DCF. In applying the DCF
method, an identified level of future cash flow is estimated. Annual estimated cash flows and a terminal value are then
discounted to their present value at an appropriate discount rate to obtain an indication of fair value. The discount rate utilized
reflects estimates of required rates of return for investments that are seen as similar to an investment in the reporting unit. DCF
analyses are based on management’s long-term financial projections and require significant judgments. Therefore, for the
Company’s reporting units where the Company has access to reliable market participant data, the market approach is conducted
in addition to the income approach in determining the fair value. The Company uses a guideline company method under the
market approach to estimate the fair value of equity and the market value of invested capital (“MVIC”). The guideline company
approach relies on estimated remaining collections data or the earnings before interest, tax, depreciation and amortization
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(“EBITDA”) for each of the selected guideline companies, which enables a direct comparison between the reporting unit and
the selected peer group. The Company believes that the current methodology used in determining the fair value at its reporting
units represent its best estimates. In addition, the Company compares the aggregate fair value of the reporting units to its overall
market capitalization.
Based on the annual goodwill impairment tests performed at October 1, 2020, no goodwill impairment existed at these
two reporting units.
On August 15, 2019, the Company completed the sale of Baycorp. The Company concluded that the fair value of Baycorp
immediately prior to the sale was less than its recorded book value and, as a result, the entire goodwill balance carried at the
Baycorp reporting unit of $10.7 million was impaired. The goodwill impairment is included in operating expenses in the
Company’s consolidated statements of operations during the year ended December 31, 2019.
Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded
goodwill and long-lived assets. Further adverse changes in the Company’s actual or expected operating results, market
capitalization, business climate, economic factors or other negative events that may be outside the control of management could
result in a material non-cash impairment charge in the future.
The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The
following table summarizes the activity in the Company’s goodwill balance during the periods presented (in thousands):
Balance as of beginning of period:
Goodwill impairment
Effect of foreign currency translation
Balance as of end of period:
Year Ended December 31,
2020
2019
$
$
884,185 $
—
22,777
906,962 $
868,126
(10,718)
26,777
884,185
The Company’s acquired intangible assets are summarized as follows (in thousands):
As of December 31, 2020
As of December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer relationships
Developed technologies
Trade name and other
$
66,796 $
(22,714) $
44,082 $
67,897 $
(18,191) $
49,706
5,048
6,644
(4,760)
(6,002)
288
642
4,734
6,299
(4,124)
(5,244)
610
1,055
Total intangible assets
$
78,488 $
(33,476) $
45,012 $
78,930 $
(27,559) $
51,371
The weighted-average useful lives of intangible assets at the time of acquisition were as follows (in years):
Customer relationships
Developed technologies
Trade name and other
Weighted-Average
Useful Lives
10
5
7
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The amortization expense for intangible assets subject to amortization was $8.0 million, $7.7 million, and $11.7 million
during the years ended December 31, 2020, 2019, and 2018, respectively. Estimated future amortization expense related to
finite-lived intangible assets as of December 31, 2020 is as follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total
$
$
6,746
6,720
6,361
6,274
6,226
12,685
45,012
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