Rating Action: Moody's assigns corporate family rating of Ba2 to Encore; places Cabot's debt ratings on Review for Upgrade
Global Credit Research - 01 Sep 2020
London, 01 September 2020 -- Moody's Investors Service ("Moody's") assigned a corporate family rating (CFR) of Ba2 to Encore Capital Group, Inc. ("Encore"). The outlook on Encore is stable.
In the same rating action, Moody's placed the B1 ratings assigned to the senior secured notes issued by the funding entities of Encore's operating subsidiaries Cabot Financial (Luxembourg) S.A and Cabot Financial (Luxembourg) II S.A on review for upgrade. This follows Encore's group reorganization announcement aiming to combine the currently legally separate funding structures of its US and EMEA operating subsidiaries under a new global funding structure . Upon consummation of the transaction, Moody's expects to upgrade the Cabot senior secured notes by one notch and to withdraw the CFR of B1 currently assigned to Cabot Financial Ltd.
Please refer to the complete list of affected ratings at the end of this press release.
RATIONALE FOR ASSIGNING A Ba2 CORPORATE FAMILY RATING TO ENCORE
The CFR of Ba2 assigned to Encore reflects the company's: 1) solid profitability and interest coverage; 2) moderate Debt/EBITDA leverage; 3) relatively long track record, with more than 20 years of operating performance; 4) large franchise, anchored in the US and supplemented with a reasonable global diversification. At the same time, the assigned CFR of Ba2 reflects: 5) potential weakening in the company's profitability and increase in earnings volatility, due to the ongoing coronavirus crisis; as well as 6) the current operating environment for debt purchasers, reflecting high regulatory risk inherent to the debt collection business, particularly in the United States.
In line with Moody's general view for the debt purchasing sector, Encore has a low exposure to environmental risks. In terms of social considerations, Moody's views Encore as moderately exposed, given that its collections and investment opportunities will likely be impacted by the coronavirus crisis, which Moody's views as a social risk under Moody's environmental, social and governance (ESG) framework, due to its substantial implications for public health and safety. Similar to other debt purchasers, customer relations represent important social considerations to Encore, given that institutions that sell both performing and non-performing debt can be highly regulated (e.g. banks) and rely on the companies' handling of customer data and privacy. Changes to regulatory rules and legal practices within a market could also affect the recovery processes and collection curves. Governance is highly relevant for Encore, as it is to all participants in the finance company sector. While Moody's does not have any particular concern around Encore's corporate governance practices, corporate governance remains a key credit consideration and requires ongoing monitoring, as is the case for all financial institutions.
RATIONALE FOR STABLE OUTLOOK ON ENCORE
The outlook is stable, reflecting Moody's expectations that Encore's financial performance in the next 12-18 months will remain consistent with its historical performance.
RATIONALE FOR PLACING CABOT'S DEBT RATINGS ON REVIEW FOR UPGRADE
The senior secured debt ratings of B1 of Cabot's senior secured notes were placed on review for upgrade, following Encore's announcement to move the current parent entity of the Cabot group to Encore, as part of its decision to combine the currently legally separate funding structures of its US and EMEA operating subsidiaries, in order to create a new global funding structure. The transaction is contingent upon receiving majority consent from Cabot noteholders.
The senior secured debt ratings of B1 assigned to Cabot's senior secured notes reflect the application of Moody's Loss Given Default for Speculative-Grade Companies methodology and the priorities of claims and asset coverage in Cabot's liability structure prior to the consummation of the transaction. The assigned debt ratings reflect Moody's expectation that Cabot's creditors will benefit from the ownership of Encore, reducing the expected loss given default. The expected upgrade of the notes by one notch upon completion of the transaction is reflective of the expected priorities of claims in Encore's liability structure.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Encore's CFR could be upgraded if the company: 1) continues to demonstrate strong financial performance, with consistently solid profitability and cash flows; 2) reduces its leverage, on a consistent basis, to less than 2.5x; 3) diversifies its geographical mix, which would reduce its exposure to the regulatory risk in a given region; and 4) if Moody's deems that the operating environment for debt purchasers has improved.
Encore's CFR could be downgraded in case of: 1) meaningful and sustained deterioration in the company's profitability and cash flows; 2) increase in leverage, on a sustained basis, to above 3.5x, measured as Debt/EBITDA; 3) failure to maintain adequate committed revolving borrowing availability, or if liquidity otherwise materially weakens; or 4) regulatory developments in a country to which the company has significant business exposure that would have significant negative impact on the company's franchise.
Upon consummation of the transaction, Moody's expects to upgrade the Cabot senior secured notes by one notch. The B1 rating on Cabot' senior secured notes will be confirmed if majority consent is not received.
The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
..Issuer: Encore Capital Group, Inc.
.... Corporate Family Rating, Assigned Ba2
.....Outlook, Assigned Stable
..Issuer: Cabot Financial (Luxembourg) S.A
.... Backed Senior Secured Rating, B1, placed on Review for Upgrade
.Outlook changed to Ratings under Review from Stable
..Issuer: Cabot Financial (Luxembourg) II S.A
.... Backed Senior Secured Rating, B1, placed on Review for Upgrade
. Outlook changed to Ratings under Review from Stable
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
 Press Release 01-Sep-2020
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Anna Sherbakova Asst Vice President - Analyst Financial Institutions Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Carola Schuler MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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