With apologies to Charles Dickens, it’s the best of times or the worst of times for the receivables management industry - known in less polite circles as debt collectors.

Broadly speaking, the sector’s fortunes are inversely correlated to the economy, so swelling unemployment and consumer and business stresses imply rosy fortunes.

But too much misery and the ‘blood from a stone’ rule kicks in: delinquent loan books are only worth something if enough can be squeezed from the debtors to make the recovery worthwhile.

Not surprisingly, the sector has a poor reputation for heavy-handed tactics, so there’s always political and social pressure for the debt wranglers not to chase the last cent by harassing impecunious debtors (or even their friends and families on Facebook).

On the evidence to date, undisputed industry leader Credit Corp (CCP) has taken prudent steps to buttress itself from the anticipated consumer pain when the government support measures and “private sector forbearance” wears off.

As with most of it peers, Credit Corp’s primary activity involves buying books of bad debts (purchased debt ledgers, or PDLs) from parties such as banks or telcos.

Thanks to finely-honed analysis tools, management can accurately predict what percentage of the outstanding debt can be recouped.

But these are not usual times and debtors are behaving in a less predictable way.

As Credit Corp noted in its recent profit results, recalcitrant debtors went on a repayment strike in March – when the Covid-19 chaos started to unfold – and abandoned long-term repayment plans.

But by June 30 repayments had returned to pre-Covid-19 levels, with an “uncharacteristically” high level of one-off repayments.

Still, reflecting the reduced chance of repayments, Credit Corp has reduced the carrying value of its $540 million PDL book by 13%, or $80m.

Having raised $155m of fresh equity in May via a placement and share purchase plan, Credit Corp has a $400m war chest to buy fresh PDLs – but “pricing will need to be adjusted to reflect expected poorer conditions.”

Credit Corp plans to spend $120-180m on PDLs in the current year – a sharp reduction on the $230m spent in the (pre Covid) 2018-19 year.

The reticence to splurge too much is understandable.

In its full year results this week, the Commonwealth Bank of Australia lifted its bad debt provision to $6.4 billion – 1.7% of its total lending, from $1.29bn (1.29% a year ago).

In the US, where Credit Corp also has a presence, JP Morgan expects credit card delinquencies to quadruple. The CBA also reported signs of trouble, but its credit card arrears blipped up to a still-modest 1.23%, from 1.03% previously.

Credit Corp also operates a consumer lending business, Wallet Wizard which extends unsecured ‘line of credit’ loans of between $500 and $5,000.

Not surprisingly, Wallet Wizard is in the eye of the storm. The division’s lending book was worth $230 million as of December 30, but with the aforementioned repayments and tighter criteria on new lending this had shrunk to $181m by June 30.

Even so, management has provisioned for 24% of these loan amount to go sour, compared with its initial estimate of 18.7%.

Despite the vicissitudes, Credit Corp’s underlying earnings rose 13% to $79.6m (pre the Covid adjustments).

Out of an abundance of caution, the final dividend - worth 36c a share last time around – has been put on ice.

Such is Credit Corp’s analytical prowess that the board is comfortable guiding to current year earnings of $60-75 million, with a full-year dividend of 45-55c a share.

With Covid-19 blighting Victoria and threatening to re-appear elsewhere, that’s a prediction worthy of Nostradamus.

Tim Boreham edits The New Criterion ([email protected])

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.