IAM Capital Markets View
PNC’s focus over FY23 will be to continue to invest in Purchased Debt Portfolios (PDPs) after improving their debt structure during 2022. There is significantly less competition in the market which places PNC on a good footing for growth, especially as the cost to service ratio becomes more efficient. Negotiating debt costs and M&A are the two positive catalysts for bond investors. This will rely on the company’s EBITDA improving over the next few years as management executes its plan. FY22 was a unique year in that there were one-offs which distorted results. For the first time in some years, PNC will present a clean set of financials in FY23.
For bond investors, a key consideration is the value of the PDP book. Pioneer has a AUD1.5b WIP inventory portfolio that has been cautiously valued at AUD296m (or <20% of total realisable value). This is both where the opportunity lies (i.e., potential upside on turnaround) but also an important input for bondholders’ recovery. Net assets currently sit at AUD41m (excluding non-cash amortisation charge to the portfolio).
The general trend has been for the bigger players to get bigger and so we can’t discount the chance of M&A activity given where the PNC share price is currently trading (a price to book ratio of <1x). Credit Corp has been the main consolidator of the industry following the purchase of Collection House’s PDP portfolio in 2020 and eventual 100% takeover in 2022. An acquisition would need to be approved under the ACCC/ASIC Debt Collection Guidelines. For bond investors, this would be a favourable outcome.
The two main risks for bond investors include:
- PDP valuations – If PDP valuations fall and/or PNC is unable to recover enough on its PDP portfolios, then if may not have appropriate cashflow to purchase new PDP portfolios impacting profitability
- Access to funding – Given PNC’s high leverage, PNC needs to obtain/manage funding facilities to continue purchasing new PDP portfolios. PNC should manage its funding base with a good mix of debt, equity, and cash generation through PDP liquidations.
PNC acquires PDPs mainly from Australian banks at a discount to face value. The PDPs can be acquired under a term forward flow (continuous) agreement or as a discrete inventory portfolio. The typical acquisition is <20% of face value.
When it comes to structuring these PDPs, the company will generally use one of the two options for customer outcome:
- A one-off settlement, which can be paid in full or discounted
- A Performing Portfolio to repay the full balance over time in-line with an allocated payment schedule
PNC is approved to purchase PDP’s from the four major banks, of which three are currently active sellers. PNC has rarely used litigation .
Typical Customer Lifecycle
- Customer takes out original line of credit with the vendor (e.g. Bank).
- A life event occurs which causes the customer to default – illness, divorce, loss of employment etc,
- After a typical 180 days of the accounting being in arrears, the account is written off by the vendor and placed for sale.
- Pioneer purchases the PDP from the vendor for c/$ and commences servicing process.
- After locating and negotiating with the customer pioneer arrives at a suitable outcome for both the customer and Pioneer (e.g. PA or settlement).
Purchase Debt Portfolio (PDP) Accounting
PNC adopted an Amortised Cost accounting framework post 2019 after using a Fair Value approach up until 2019. The Amortised Cost accounting framework is highlighted below:
FY22 saw improved PDP liquidations alongside a lower cost to service. The liquidation performance was a direct result of:
- Improved operational performance;
- Early benefits of a material increase in PDP purchasing; and
- Increase in its Performing Portfolio (where debtors are repaying)
The cost to service ratio was lower given employee expenses dropped as a % of liquidations. Going forward there is scope for PNC to improve this ratio to the high 30%’s, which will flow directly through to EBITDA. The PDP impairments relate to a reassessment in the carrying value of PDPs. The increase was largely due to higher inflation which impacts the ability for households to repay impaired debt.
Positively, net interest when stripping out the break-fees on the Nomura led debt syndicate was AUD28.6mn (or largely flat year on year) as opposed to AUD36.4mn. This is where there is room for improvement – especially as the company improves its EBITDA over the next few years.
Table 1: Profit & Loss
Source: Pioneer Credit Financial Information
Note: CV = Carrying Value and Cost to Service Ratio = [Cash Expenses / PDP Liquidations]
PDP assets increased over FY22 due to new purchases undertaken. The borrowings are constituted by a AUD207.8mn 4-year senior debt facility and medium-term notes of AUD55.5mn. The 4-year facility from Fortress Investment Group refinanced a prior Nomura led debt syndicate. During early FY22, PNC raised AUD16.2mn in equity via a placement and priority offer. It also raised an additional AUD5.4mn, bringing total equity to AUD21.6mn.
The current borrowings / CV of PDPs sits at 87%. We expect the company to bring this ratio down to low 60%’s. Note, within the current funding mix of:
- AUD200mn senior debt facility – BBSW +875bps
- AUD60mn medium-term notes – BBSW +875bps
There is an opportunity in late 2023 to renegotiate/refinance the senior debt facility to improve the effective annual interest rate.
Table 2: Balance Sheet
Source: Pioneer Credit Financial Information
Note: PDP value represents estimate fair value carrying amount, net of amortisation.
About Pioneer Credit
Pioneer Credit (PNC) acquires portfolios of impaired consumer debt mainly from Australian banks at a discount to face value. The objective is to collect the debt in-line with an allocated payment schedule. PNC originated from the formation of Pioneer Credit Management Services (2000) which underwent various ownership changes, until being re-acquired in 2009 by the current PNC Managing Director Mr Keith John and others.
PNC was listed on the ASX in May 2014. PNC has been a top player in the Australian Purchased Debt Portfolio market for impaired debts. Annual PDP purchases have been between AUD25-AUD100mn pa.
In 2021, PNC sourced a AUD200mn, 4-year senior debt facility from Fortress Investment Group to refinance a prior Nomura led debt syndicate and facilitate ongoing PDP purchases. PNC is well placed following the exit of Credit Corporation (CCP) to maintain its top place in the Australian PDP market. It recently signed a 5-year forward PDP purchasing agreement with CBA.
Summary of the Notes – PIOCRE Float 11/30/26
|Pioneer Credit MTN Increase|
|Issuer||Pioneer Credit Limited|
|Coupon Type||Floating Rate Note|
|Coupon||3M BBSW +8.75%|
|Maturity Date||30 Nov 2026 (5yr)|
|Early Call Premiums||Year 1 $104, Year 2 $103, Year 3 $102, Year 4 $101|