itch Ratings has affirmed all ratings, but revised two Outlooks to Stable from Positive, and one to Negative Outlook from Rating Watch Negative, in its periodic review of European and North American debt collectors, which included seven debt purchasers and one debt servicer (doValue S.p.A.). Two issuers’ ratings remain on Negative Outlook. The ratings are as follows:
– Encore Capital Group, Inc.: affirmed at ‘BB+’; Outlook Stable
– PRA Group, Inc.: affirmed at ‘BB+’; Outlook Negative
– doValue S.p.A.: affirmed at ‘BB’; Outlook revised to Stable from Positive
– Intrum AB (publ): affirmed at ‘BB’; Outlook Negative
– Jefferson Capital Holdings LLC: affirmed at ‘BB-‘; Outlook Stable
– Sherwood Parentco Limited (Arrow): affirmed at ‘BB-‘; Outlook Stable
– Garfunkelux Holdco 2 S.A. (Lowell): affirmed at ‘B+’; Outlook revised to Stable from Positive
– DDM Holding AG (DDM): affirmed at ‘B-’; Outlook Negative, off RWN
Combined, the reviewed issuers account for a substantial proportion of the European and North American credit management market and own portfolios, with close to EUR30 billion in estimated remaining collections.
Fitch views the operating environment for debt collectors as weaker than a year ago. This is influenced both by the rising outlook for funding costs following successive central bank increases in interest rates, and by slower debt collections amid inflation and cost-of-living pressures. However, the sector does have some counter-cyclical characteristics, reflected in a probable increase in the supply of non-performing loans to the purchasing market amid asset quality deterioration at loan originators.
The rating affirmations primarily reflect the issuers’ adequate headroom above downgrade triggers, despite the more challenging operating environment. However, the revision to Stable of the two previously Positive Outlooks, in conjunction with two revisions to Negative from Stable during the course of the past year, indicate issuers are positioned, on average, less strongly within their rating levels than a year ago.
Most of the rated issuers have limited near-term debt maturities and funding, which is predominantly either at fixed rates or hedged. However, the significant refinancing requirements the sector will face from 2025 are likely to be more costly than the issuance they replace. This is unless current trends change significantly, with disciplined pricing of investments by issuers needed, also so as to absorb inflationary pressure on operating expenses, particularly at a time when their debt collections may be adversely affected by consumers’ cost-of-living strain.
Fitch expects issuers to increase their purchasing activity in the next year, assuming supply to the market increases from its recent low base. This may raise leverage, via the debt required to finance such investment, in addition to likely higher funding costs. Available capacity for near-term portfolio growth is principally via super-senior revolving credit facilities, the drawn cost of which has typically risen significantly in the past year, and increased extended use of these could also reduce estimated recoveries for junior-ranking senior debt.
Fitch believes that larger or more diversified debt collectors, with lower leverage ratios and longer-dated fixed-rate funding profiles, are best-placed to withstand current operating environment pressures, which is reflected in their respective ratings. Lower-rated peers typically exhibit narrower franchises, fewer scale benefits or elevated financial leverage.
Source: Fitch Ratings
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