Encore Capital Group, Inc. -- Moody's upgrades Encore's senior secured debt rating to Ba2; outlook stable

Rating Action: Moody's upgrades Encore's senior secured debt rating to Ba2; outlook stableGlobal Credit Research - 09 Mar 2022London, March 09, 2022 -- Moody’s Investors Service (“Moody’s”) today upgraded Encore Capital Group, Inc.’s (Encore) corporate family rating (CFR) to Ba1 from Ba2 and its guaranteed senior secured debt rating to Ba2 from Ba3. The issuer outlook has been changed to stable from positive.A full list of affected ratings can be found at the end of this press release.RATINGS RATIONALEThe upgrade of Encore’s corporate family rating to Ba1 from Ba2 reflects the company’s strong and consistent financial performance, as evidenced by high levels of profitability, moderate leverage and solid liquidity, with abundant availability under its credit line and laddered debt maturities. In addition, the Ba1 CFR reflects Encore's demonstrated resilience of its global franchise, as evidenced by the company's strong financial performance since the onset of the coronavirus pandemic. The Ba1 CFR also incorporates Encore's relatively long track record, with more than 20 years of operating performance, but at the same time takes into account regulatory risk inherent to the debt collection business, particularly in the United States (US).The strength of Encore's performance has been underpinned by higher-than-expected cash collections in the US in 2020-2021, where borrowers in distress benefitted from a number of direct stimulus measures taken by the US government in response to the coronavirus pandemic. Strong collections activity boosted the company's profitability, cash flows and capitalisation and resulted in moderate deleveraging, with Moody's calculated Debt to EBITDA ratio declining to 2.0x at year-end 2021 from 2.5x at year-end 2020.At the same time, Moody's expects moderation in Encore's profitability and cash flow metrics, now that government support measures in the US and the UK have been phased out. The progressive recovery of the economy and rebound in consumption and spending will lead to higher delinquencies and a drop in collections, but will also increase the supply of non-performing loans available for investment. Inflationary pressures and higher energy prices will also lead to a decline in profitability through a reduction in consumers’ ability to pay. The expected decline in earnings, in conjunction with increased borrowings to finance larger amounts of portfolio investments, will result in a moderate weakening of Encore’s interest coverage and Debt/EBITDA leverage, although Moody’s anticipates that the company’s key credit metrics will remain consistent with those of the Ba1 corporate family rating.The Ba2 rating of Encore's guaranteed senior secured notes is based on Encore's Ba1 CFR and reflects the application of Moody's Loss Given Default for Speculative-Grade Companies methodology, published in December 2015, and the priorities of claims and asset coverage in Encore's liability structure.The outlook is stable, reflecting Moody's expectations that despite the expected moderation, Encore's profitability, interest coverage and leverage metrics will remain strong, consistent with its historical performance and with credit metrics of the Ba1 corporate family rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSEncore's CFR could be upgraded if the company: 1) continues to demonstrate strong financial performance, with consistently solid profitability and cash flows; 2) diversifies its geographical mix, which would reduce its exposure to the regulatory risk in a given region; 3) diversifies its product offering mix to include revenue sources from capital-light fee-based businesses; and 4) if Moody's deems that the operating environment for debt purchasers has further 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 3x, measured as Debt/EBITDA; 3) substantial erosion in capitalisation; 4) failure to maintain adequate committed revolving borrowing availability, or if liquidity otherwise materially weakens; or 5) regulatory developments in a country to which the company has significant business exposure that would have significant negative impact on the company's franchise.A change in the CFR would lead to a similar upward or downward change of the guaranteed senior secured debt rating. Further, the guaranteed senior secured debt rating could be upgraded with changes to the liability structure that would decrease the amount of debt considered senior to the notes or increase the amount of debt considered junior to the notes. The debt rating could be downgraded if the amount of debt considered senior to the notes increases.LIST OF AFFECTED RATINGSIssuer: Encore Capital Group, Inc...Upgrades:....Corporate Family Rating, upgraded to Ba1 from Ba2....Backed Senior Secured Regular Bond/Debenture, upgraded to Ba2 from Ba3..Outlook Action:....Outlook changed to Stable from PositivePRINCIPAL METHODOLOGYThe 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.REGULATORY DISCLOSURESFor 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.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 Laurie Mayers Associate Managing Director Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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