- Supply/Demand Headwinds: The market for buying defaulted receivables is especially unfavorable. Demand for paper has exceeded supply for a few years now, mirroring the environment last seen from 2005-2007 when shares of PRAA tumbled ~70%.
- Growing Debt: Leverage at the company has risen quickly in the wake of the Activ deal.
- Insiders Dumping: Widespread insider selling suggests that insiders see similar intermediate/longer-term headwinds.
- History's Guide: Our analysis of the interplay between labor markets, terminal IRRs and pre-tax margins will shed light on what to expect fundamentally from a timing standpoint.
- Regulatory Pressure: The CFPB is expected to set new rules for debt collectors in 2016.
- Current Value Unsustainable: The ERC less cost to collect and taxes is currently ~$400mn below the net debt of the company.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT