DEBT PURCHASERS
All,
Hoist have published their FY18 / Q4 statements today / held their report.
Read across for non-bank players: Intrum, Lowell, Arrow
- First of all positive. Hoist are seeing a relaxing of the competition in the market. That should be a positive for all players. A recovery in price would go a long way to right-sizing the balance sheets involved - i.e. raising CF and make most players CF positive.
- The regulation does not directly impact the likes of Lowell and Arrow.
- The securitisation “trick” should keep Hoist in the business. So no exit there.
Summary:
- IRRs on the front book are higher than on the back-book. Price pressure is abating somewhat as some PE funds are leaving in particular the Italian market.
- In December the FSA raised risk weightings for back-book unsecured NPLs to 150%. From here on, new acquisitions of secured and unsecured NPLs are to be written down in seven and three years respectively. This is weighing visibly on Hoist’s equity ratio by 2-3% points at this time. However increasingly so going forward - in particular from unsecured portfolios where collections are typically much longer than the 3 years regulatory horizon, raising questions about the capitalisation of some debt purchasers in the future.
- After buying back SEK 360m Bonds, the company had net outflows of near SEK600m in Q4, bringing its liquidity reserve back in line with Dec17. However it has managed to attract further deposits, increasing its competitive advantage over peers through low cost deposit funding. Cost saving is a central commitment - very refreshing!
- The table below (page 5 of the annual report) illustrates the trend on debt purchasers balance sheets, where liabilities surpass portfolio assets. This is what many investors take issue with.
- Cash-flow wise the company is one of the best in the industry, with marginal cash production while still rapidly expanding.
Impact on Debt Purchasers:
Hoist are looking to circumvent the new regulation by acquiring new NPLs through a securitised fund vehicle, managed by a "third party” fund manager. The securities would be rated and some of the funding would be issued directly out of that vehicle, but for Hoist, this would preserve the ability to raise low-cost deposits to finance the majority of the operation.
Nonetheless, Hoist are looking to move acquisitions increasingly towards secured NPLs - to improve capital efficiency.
If the mitigations outlined above fail:
- ROE and EPS growth going forward should each be 5% lower.
- No impact on cost to income
- T1 ratio falls to only 1.75-3.75% - i.e. by 0.75%
Wolfgang