About Pioneer:
Pioneer Credit (PNC) is one of the leading acquirers and managers of impaired credit in Australia has built its status through its strong customer engagement, flawless track record with ASIC and strong relationships with Austrlaian’s largest bank and non-bank lenders. PNC purchases debt from 18 different Australian vendor partners with long-term partnership purchasing agreements in place with CBA. PNC debt purchases are considered either performing or non-performing consumer debt portfolios (PDPs).
The company generates its revenue through recovering debts via contacting the debtors and negotiating payment arrangements or settlements. It borrows at a margin over bank bills to fund purchases of PDPs, paying a discounted face value of typically less than A$0.20 per A$1 of debt. EBITDA (or earnings) are a function of debtor/customer management and assessment of credit risk amongst each debtor/customer.
IAM CM View:
PNC has returned to a normal environment in FY23 and beyond, as a tightening economy with full employment provides a more certain outlook for purchase of PDPs and profitability. The company expects to refinance a portion of the current debt facility in CY2023. Returning to a normal interest rate of 7-9% would have reduced interest payments in FY23 by A$6-12m over the year and result in a “much improved” EBITDA interest cover. Positively, the company returned to profitability with NPAT of A$0.2m (FY22: -A$33.1m) and cash collections from PDPs were A$132.6m (+24% relative to FY22: A$106.8m). There was a +42% increase in management EBITDA to A$86.1m. All other portfolio measures are solid.
The PNC secured subordinated bonds are currently trading at depressed levels. In our view, PNC is receiving no credit for the turnaround in FY23 to date nor the improved outlook for FY24 and beyond. If PNC can refinance and improve its interest margin and improve cash collection performance then it will be well on the way to enhancing its credit profile. The debt burden is still significant (A$266.2m) and there are risks – but there is light at the end of the tunnel and operationally the company cannot be faulted.
Investors seeking a high-yield opportunity with potential for upside should consider the PNC secured subordinated bonds. A lot boils down to refinace situation (as opposed to the operational situation) and ability to restructure debt facilities at lower interest rates. The issue pays a quarterly coupon of 3m BBSW +8.75% which delivered a 12.8955% coupon set in the last quarterly re-set. The expected return to maturity is 18.512% or a trading margin of +1412bps.
Transaction Pricing:
*Yield calculated as trading margin + the relevant swap rate to maturity
Pioneer Credit (PNC) Update
We would note that the competitor Credit Corp Group (ASX: CCP) has announced an impairment of A$45m on the carrying value of its US-purchased debt ledger assets. This news has no implications for PNC as it does not operate in the US market. PNC is not seeing a similar increase in Australian defaults in recently acquired portfolios as experienced by CCP.
Source: Bloomberg
We would expect PNC to target a medium to longer-tern Net debt/EBITDA of 3-4x (from their current 7x) as EBITDA grows through lower interest payments as well as growth in the PDP book. Full employment, a higher cost of living and catch-up of loan deferrals from COVID-19 customers are expected to leave a higher number of consumers in distress but able to restructure debt payments. This environment should help PNC to deliver a stronger profit in addition to maintaining asset and revenue growth.
PNC FY23 Results
PNC’s generated strong cash collections with a significant increase in FY23 as portfolio sales normalise post-pandemic. Cash collections rose +24% in FY23 versus FY22 driven by increased acquisition of PDPs in FY22.
Source: Bloomberg
PNC have commenced a refinancing process to reduce funding costs. Management provided a sensitivity table based on FY23 illustrating the potential gains from a normalisation of the current relatively punative arrangements.
Source: RAS Research
The company expects to refinance a portion of the current debt facility in CY2023. Returning to a normal interest rate of 7-9% would have reduced interest payments in FY23 by A$6-12m over the year and result in a “much improved” EBITDA interest cover.
