Refinancing risk is growing for global debt buyers as their debt capital market access becomes less reliable, and due to challenges in executing deleverage plans amid pressure on collection rates, Fitch Ratings says. Some stronger debt purchasers have recently accessed the markets, but those with weaker credit profiles or near-term debt maturities may struggle to refinance at an affordable cost.
Debt purchasers borrow to fund the acquisition of non-performing loans (NPLs) from banks and other originators at a discounted price, which they then seek to collect at a profit, typically over several years. The sector grew significantly in the low interest rate period between the 2007–2008 global financial crisis and the pandemic, also benefitting from regulatory pressure on banks to offload problem assets.
Interest rate rises in 2022 and 2023 have pushed up funding costs, increasing the need for pricing discipline when acquiring new NPL portfolios. Higher interest rates are also likely to erode the profitability of part-collected portfolios as the underlying debtors’ repayment capacity is squeezed by cost-of-living pressures.
Fitch has a ‘deteriorating’ sector outlook for debt purchasers in 2024, and downgraded Intrum by two notches in March and Lowell by one notch in May 2024. Debt purchasers’ ratings, which are typically in the ‘B’ and ‘BB’ rating categories, already reflect their sensitivity to wholesale funding, but an inability to access capital markets would erode rating headroom and could lead to further negative rating actions.
Challenging funding market conditions this year have increasingly highlighted differences between debt purchasers’ funding and leverage profiles. Those with lower leverage and more staggered maturity profiles, such as Encore Capital (BB+/Stable) and PRA Group (BB+/Negative), have been able to address medium-term maturities through the recent issuance of benchmark-sized bonds. However, issuers with more concentrated funding profiles, notably Intrum and Lowell, have yet to refinance their 2025 maturities.
Current bond yields indicate that refinancing transactions would be at materially higher rates than average existing funding costs, which would put further pressure on the stability of some firms’ business models. Some debt purchasers have sought to mitigate their exposure to higher interest rates by increasing their focus on capital-light revenue, such as through debt servicing or managing portfolios for third-party investors. However, their adjusted business models are yet to be fully proven, which could reduce their ability to access funding at competitive prices.
The risk of debt exchange, or “amend and extend”, transactions has increased for debt purchasers with weaker credit profiles. Such transactions could weigh on Fitch’s assessment of issuers’ funding and liquidity profiles, and, in an adverse scenario, Fitch could classify them as distressed debt exchanges. Both Intrum, in March, and iQera Group (unrated), in April, announced that they had appointed financial advisors to evaluate their capital structures, which could lead to debt restructurings.
Rated debt purchasers’ collections performance was generally fairly sound in 2023 and 1Q24 despite the cost-of-living pressure on debtors. However, they still face inflationary pressure on their own overheads and finance costs.
Except for the issuers that have been subject to recent negative rating actions, debt maturities for debt purchasers in 2H24–2025 are modest. However, maturities increase significantly in 2026, with new funding likely to be costlier than the funding it replaces, even if policy interest rates have eased.
