10-Q 1 ecpg-20220331.htm 10-Q ecpg-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________________________________
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022 or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________.
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware48-1090909
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
350 Camino De La Reina, Suite 100
San Diego, California 92108
(Address of principal executive offices, including zip code)
(877) 445 - 4581
(Registrant’s telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)
_______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par Value Per ShareECPGThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.        
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding at April 28, 2022
Common Stock, $0.01 par value24,259,465 shares


ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
 
 Page



PART I – FINANCIAL INFORMATION
Item 1— Consolidated Financial Statements (Unaudited)
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)
March 31,
2022
December 31,
2021
Assets
Cash and cash equivalents$160,217 $189,645 
Investment in receivable portfolios, net3,137,386 3,065,553 
Property and equipment, net115,716 119,857 
Other assets324,521 335,275 
Goodwill876,541 897,795 
Total assets
$4,614,381 $4,608,125 
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities$229,839 $229,586 
Borrowings2,934,033 2,997,331 
Other liabilities204,134 195,947 
Total liabilities
3,368,006 3,422,864 
Commitments and Contingencies (Note 11)
Equity:
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding
  
Common stock, $0.01 par value, 75,000 shares authorized, 24,361 and 24,541 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
244 245 
Additional paid-in capital  
Accumulated earnings1,310,039 1,238,564 
Accumulated other comprehensive loss(63,908)(53,548)
Total stockholders’ equity1,246,375 1,185,261 
Total liabilities and stockholders’ equity$4,614,381 $4,608,125 
The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See “Note 8: Variable Interest Entities” for additional information on the Company’s VIEs.
March 31,
2022
December 31,
2021
Assets
Cash and cash equivalents$1,522 $1,927 
Investment in receivable portfolios, net486,909 498,507 
Other assets3,371 3,452 
Liabilities
Accounts payable and accrued liabilities105 105 
Borrowings459,847 473,443 
Other liabilities22 10 
See accompanying notes to consolidated financial statements
3

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended
March 31,
 20222021
Revenues
Revenue from receivable portfolios$304,105 $338,018 
Changes in recoveries167,223 44,537 
Total debt purchasing revenue471,328 382,555 
Servicing revenue26,146 32,516 
Other revenues2,208 1,766 
Total revenues499,682 416,837 
Operating expenses
Salaries and employee benefits96,956 96,456 
Cost of legal collections55,717 67,142 
General and administrative expenses33,534 32,148 
Other operating expenses27,027 28,441 
Collection agency commissions9,605 12,824 
Depreciation and amortization11,829 11,512 
Total operating expenses234,668 248,523 
Income from operations265,014 168,314 
Other expense
Interest expense(34,633)(46,526)
Other income (expense)392 (55)
Total other expense(34,241)(46,581)
Income before income taxes230,773 121,733 
Provision for income taxes(55,024)(26,968)
Net income 175,749 94,765 
Net income attributable to noncontrolling interest (135)
Net income attributable to Encore Capital Group, Inc. stockholders$175,749 $94,630 
Earnings per share attributable to Encore Capital Group, Inc.:
Basic$7.11 $3.01 
Diluted$6.40 $2.97 
Weighted average shares outstanding:
Basic24,722 31,469 
Diluted27,482 31,832 
See accompanying notes to consolidated financial statements
4

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited, In Thousands)
 Three Months Ended
March 31,
 20222021
Net income$175,749 $94,765 
Other comprehensive income, net of tax:
Change in unrealized gain on derivative instruments:
Unrealized gain on derivative instruments15,592 1,761 
Income tax effect(3,698)(378)
Unrealized gain on derivative instruments, net of tax11,894 1,383 
Change in foreign currency translation:
Unrealized (loss) gain on foreign currency translation(22,254)2,890 
Unrealized (loss) gain on foreign currency translation, net of divestiture(22,254)2,890 
Other comprehensive (loss) income, net of tax:(10,360)4,273 
Comprehensive income165,389 99,038 
Comprehensive income attributable to noncontrolling interest:
Net income attributable to noncontrolling interest (135)
Unrealized gain on foreign currency translation (1)
Comprehensive income attributable to noncontrolling interest: (136)
Comprehensive income attributable to Encore Capital Group, Inc. stockholders$165,389 $98,902 
See accompanying notes to consolidated financial statements
5

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(Unaudited, In Thousands)
Three Months Ended March 31, 2022
Common StockAdditional Paid-In CapitalAccumulated EarningsAccumulated Other Comprehensive LossNoncontrolling InterestTotal Equity
SharesPar
Balance as of December 31, 202124,541 $245 $ $1,238,564 $(53,548)$ $1,185,261 
Net income— — — 175,749 — — 175,749 
Other comprehensive loss, net of tax— — — — (10,360)— (10,360)
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes220 3 (3,921)(7,434)— — (11,352)
Repurchase of common stock(400)(4)— (25,688)— — (25,692)
Stock-based compensation— — 3,921 — — — 3,921 
Settlement of convertible senior notes— — — (71,152)— — (71,152)
Balance as of March 31, 202224,361 $244 $ $1,310,039 $(63,908)$ $1,246,375 
Three Months Ended March 31, 2021
Common StockAdditional Paid-In CapitalAccumulated EarningsAccumulated Other Comprehensive (Loss) IncomeNoncontrolling InterestTotal Equity
SharesPar
Balance as of December 31, 202031,345 $313 $230,440 $1,055,668 $(68,813)$2,468 $1,220,076 
Cumulative adjustment— — (40,372)22,458 — — (17,914)
Net income— — — 94,630 — 135 94,765 
Other comprehensive income, net of tax— — — — 4,272 1 4,273 
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes183 2 (5,433)— — — (5,431)
Repurchase of common stock(518)(5)(20,385)— — — (20,390)
Stock-based compensation— — 3,405 — — — 3,405 
Balance as of March 31, 202131,010 $310 $167,655 $1,172,756 $(64,541)$2,604 $1,278,784 

See accompanying notes to consolidated financial statements

6

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 Three Months Ended March 31,
 20222021
Operating activities:
Net income$175,749 $94,765 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization11,829 11,512 
Other non-cash interest expense, net4,196 4,749 
Stock-based compensation expense3,921 3,405 
Deferred income taxes2,806 (3,302)
Changes in recoveries(167,223)(44,537)
Other, net4,787 4,931 
Changes in operating assets and liabilities
Other assets1,447 (3,816)
Prepaid income tax and income taxes payable51,200 28,627 
Accounts payable, accrued liabilities and other liabilities(34,182)(27,215)
Net cash provided by operating activities54,530 69,119 
Investing activities:
Purchases of receivable portfolios, net of put-backs(166,298)(167,025)
Collections applied to investment in receivable portfolios215,309 268,443 
Purchases of property and equipment(7,079)(3,792)
Other, net(4,842)(2,359)
Net cash provided by investing activities37,090 95,267 
Financing activities:
Proceeds from credit facilities328,273 273,293 
Repayment of credit facilities(180,614)(235,399)
Repayment of senior secured notes(9,770)(9,770)
Repayment of convertible senior notes(221,152)(161,000)
Repurchase of common stock(25,692)(20,390)
Other, net(9,061)(6,844)
Net cash used in financing activities(118,016)(160,110)
Net (decrease) increase in cash and cash equivalents(26,396)4,276 
Effect of exchange rate changes on cash and cash equivalents(3,032)(8,862)
Cash and cash equivalents, beginning of period189,645 189,184 
Cash and cash equivalents, end of period$160,217 $184,598 
Supplemental disclosure of cash information:
Cash paid for interest$31,771 $37,258 
Cash paid for taxes, net of refunds949 813 
    

See accompanying notes to consolidated financial statements
7

ENCORE CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans in Europe.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates (collectively, “Cabot”), the Company is one of the largest credit management services providers in Europe and a market leader in the United Kingdom. These are the Company’s primary operations.
The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as “LAAP.”
Financial Statement Preparation and Presentation
The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Basis of Consolidation
The consolidated financial statements have been prepared in conformity with GAAP and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates variable interest entities (“VIEs”) for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 8: Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in consolidation.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Translation gains or losses are the material components of accumulated other comprehensive income or loss and are reclassified to earnings upon the substantial sale or liquidation of investments in foreign operations.
8

Recently Adopted Accounting Guidance
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2022, as compared to the recent accounting pronouncements described in our Annual Report, that have significance, or potential significance, to the Company’s consolidated financial statements.
Note 2: Earnings Per Share
Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock-based awards, and the dilutive effect of the convertible and exchangeable senior notes, if applicable.
On August 12, 2015, the Company’s Board of Directors approved a $50.0 million share repurchase program. On May 5, 2021, the Company announced that the Board of Directors had approved an increase in the size of the repurchase program from $50.0 million to $300.0 million (an increase of $250.0 million). Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the Company’s management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. The Company continues to repurchase its common stock under this program. During the three months ended March 31, 2022, the Company repurchased 399,522 shares of its common stock for approximately $25.6 million. The Company’s practice is to retire the shares repurchased.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands, except per share amounts):
 Three Months Ended
March 31,
 20222021
Net income attributable to Encore Capital Group, Inc. stockholders$175,749 $94,630 
Total weighted-average basic shares outstanding24,722 31,469 
Dilutive effect of stock-based awards540 363 
Dilutive effect of convertible and exchangeable senior notes2,220  
Total weighted-average dilutive shares outstanding27,482 31,832 
Basic earnings per share$7.11 $3.01 
Diluted earnings per share$6.40 $2.97 
Anti-dilutive employee stock options outstanding were zero and approximately 13,000 during the three months ended March 31, 2022 and 2021, respectively.
Note 3: Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
9

Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 Fair Value Measurements as of March 31, 2022
 Level 1Level 2Level 3Total
Assets
Interest rate cap contracts$ $13,120 $ $13,120 
Liabilities
Cross-currency swap agreements (21,719) (21,719)
Contingent consideration  (5,069)(5,069)
 Fair Value Measurements as of December 31, 2021
 Level 1Level 2Level 3Total
Assets
Interest rate cap contracts$ $3,541 $ $3,541 
Liabilities
Cross-currency swap agreements (16,902) (16,902)
Contingent consideration  (5,218)(5,218)
Derivative Contracts:
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Contingent Consideration:
The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date based on actual and forecasted operating performance. Changes in fair value of contingent consideration are included in other operating expenses in the Company’s consolidated statements of income.
The following table provides a roll-forward of the fair value of contingent consideration for the three months ended March 31, 2022 and year ended December 31, 2021 (in thousands):
Amount
Balance as of December 31, 2020$2,957 
Issuance of contingent consideration in connection with purchase of noncontrolling interest2,913 
Change in fair value of contingent consideration(388)
Payment of contingent consideration(180)
Effect of foreign currency translation(84)
Balance as of December 31, 20215,218 
Effect of foreign currency translation(149)
Balance as of March 31, 2022$5,069 
Non-Recurring Fair Value Measurement:
Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined at the time of initial recognition and in each reporting period using Level 3 measurements based on appraised values using market comparable. The fair value estimate of the assets held for sale was approximately $52.2 million and $44.6 million as of March 31, 2022 and December 31, 2021, respectively.
10

Financial Instruments Not Required To Be Carried At Fair Value
The table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts in the following table are included in the consolidated statements of financial condition as of March 31, 2022 and December 31, 2021 (in thousands):
 March 31, 2022December 31, 2021
 Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Financial Assets
Investment in receivable portfolios, net$3,137,386 $3,460,468 $3,065,553 $3,416,926 
Financial Liabilities
Convertible senior notes due March 2022(1)
  150,000 195,009 
Exchangeable senior notes due September 2023172,500 259,010 172,500 257,782 
Convertible senior notes due October 2025100,000 164,573 100,000 165,887 
Senior secured notes(2)
1,562,408 1,543,874 1,606,327 1,652,246 
Encore private placement notes97,700 96,534 107,470 108,652 
_______________________
(1)The 2022 Convertible Senior Notes matured on March 15, 2022 and the Company repaid the notes in cash.
(2)Carrying amount represents historical cost, adjusted for any related debt discount or debt premium.
Investment in Receivable Portfolios:
The fair value of investment in receivable portfolios is measured using Level 3 inputs by discounting the estimated future cash flows generated by the Company’s proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
Borrowings:
The Company’s convertible notes, exchangeable notes, senior secured notes and private placement notes are carried at historical cost, adjusted for the applicable debt discount. The fair value estimate for the convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs. The fair value of the senior secured notes and private placement notes is estimated using widely accepted valuation techniques, including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates.
The carrying value of the Company’s senior secured revolving credit facility and securitisation senior facility approximates fair value due to the use of current market rates that are repriced frequently.
Note 4: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment.
11

The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated statements of financial condition (in thousands):
 March 31, 2022December 31, 2021
Balance Sheet LocationFair ValueBalance Sheet LocationFair Value
Derivatives designated as hedging instruments:
Interest rate cap contractsOther assets$13,120 Other assets$3,541 
Cross-currency swap agreementsOther liabilities(21,719)Other liabilities(16,902)
Derivatives Designated as Hedging Instruments
The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. The Company historically designated its interest rate swap instruments as cash flow hedges. As of March 31, 2022, there were no interest rate swap agreements.
The Company also uses interest rate cap contracts to manage its risk related to the interest rate fluctuations in its variable interest rate bearing debt. As of March 31, 2022, the Company held two interest rate cap contracts with a notional amount of approximately $902.5 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a notional amount of €400.0 million (approximately $442.7 million based on an exchange rate of $1.00 to €0.90, the exchange rate as of March 31, 2022) and matures in June 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) bearing debt (“2021 Cap”) has a notional amount of £350.0 million (approximately $459.8 million based on an exchange rate of $1.00 to £0.76, the exchange rate as of March 31, 2022) and matures in September 2024. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2021 Cap as cash flow hedge instruments. The Company expects to reclassify approximately $0.6 million of net derivative loss from OCI into earnings relating to interest rate caps within the next 12 months.
The Company has operations in foreign countries that expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, including foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis. As of March 31, 2022, there were no foreign currency forward contracts.
The Company uses cross-currency swap agreements to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt. The cross-currency swap agreements are accounted for as cash flow hedges. As of March 31, 2022, there were four cross-currency swap agreements outstanding with a total notional amount of €350.0 million (approximately $387.4 million based on an exchange rate of $1.00 to €0.90, the exchange rate as of March 31, 2022). The Company expects to reclassify approximately $5.5 million of net derivative loss from OCI into earnings relating to cross-currency swaps within the next 12 months.
The following tables summarize the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated financial statements (in thousands):
Derivatives Designated as Hedging InstrumentsGain (Loss) Recognized in OCILocation of Gain (Loss) Reclassified from OCI into Income (Loss)Gain (Loss) Reclassified from OCI into Income (Loss)
Three Months Ended March 31,Three Months Ended March 31,
2022202120222021
Interest rate swap agreements$ $(11)Interest expense$ $(2,271)
Interest rate cap contracts9,763 195 Interest expense(170)(107)
Cross-currency swap agreements(6,404)(18,329)Interest expense / Other expense(12,063)(17,528)

12

Note 5: Investment in Receivable Portfolios, Net
The Company’s purchased portfolios of loans are grossed-up to their face value with an offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables immediately after purchasing the portfolio. The Company then records a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which ultimately equals the amount paid for a portfolio purchase and presented as “Investment in receivable portfolios, net” in the Company’s consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.
Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.
Revenue is recognized for each static pool over the economic life of the pool. Debt purchasing revenue includes two components:
(1)     Revenue from receivable portfolios, which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR) and also includes all revenue from zero basis portfolio (“ZBA”) collections, and
(2)     Changes in recoveries, which includes
(a)     Recoveries above or below forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period; and
(b)     Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e. amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases).
The Company measures expected future recoveries based on historical experience, current conditions, and reasonable and supportable forecasts. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and macroeconomic conditions.
13

The following table summarizes the changes in the balance of investment in receivable portfolios, net during the periods presented (in thousands):
Three Months Ended
March 31,
20222021
Balance, beginning of period$3,065,553 $3,291,918 
Purchases of receivable portfolios (1)
169,505 170,178 
Collections applied to investment in receivable portfolios, net (2)
(215,309)(268,443)
Changes in recoveries (3)
167,223 44,537 
Put-backs and Recalls(3,207)(3,153)
Disposals and transfers to assets held for sale(1,976)(1,665)
Foreign currency adjustments(44,403)(7,694)
Balance, end of period$3,137,386 $3,225,678 
_______________________
(1)The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented:
Three Months Ended
March 31,
20222021
Purchase price$169,505 $170,178 
Allowance for credit losses350,186 374,575 
Amortized cost519,691 544,753 
Noncredit discount657,058 784,112 
Face value1,176,749 1,328,865 
Write-off of amortized cost(519,691)(544,753)
Write-off of noncredit discount(657,058)(784,112)
Negative allowance169,505 170,178 
Negative allowance for expected recoveries - current period purchases$169,505 $170,178 
(2)Collections applied to investment in receivable portfolios, net, is calculated as follows during the periods presented:
Three Months Ended
March 31,
20222021
Cash Collections$519,414 $606,461 
Less - amounts classified to revenue from receivable portfolios(304,105)(338,018)
Collections applied to investment in receivable portfolios, net$215,309 $268,443 
(3)Changes in recoveries is calculated as follows during the periods presented, where recoveries include cash collections, put-backs and recalls, and other cash-based adjustments:
Three Months Ended
March 31,
20222021
Recoveries above forecast$46,352 $91,401 
Changes in expected future recoveries120,871 (46,864)
Changes in recoveries$167,223 $44,537 
Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. Collections during the three months ended March 31, 2022 significantly outperformed the projected cash flows by approximately $46.4 million. The Company believes the collection over-performance was a result of its sustained improvements in portfolio collections driven by change in consumer behavior and the Company’s liquidation improvement initiatives.
14

When reassessing the forecasts of expected lifetime recoveries during the three months ended March 31, 2022, management considered historical and current collection performance, and believes that for certain static pools sustained collections over-performance resulted in increased total expected recoveries. As a result, the Company has updated its forecast, resulting in a net increase of total estimated remaining collections which in turn, when discounted to present value, resulted in a positive change in expected future period recoveries of approximately $120.9 million during the three months ended March 31, 2022. During the three months ended March 31, 2021, the Company recorded approximately $46.9 million in negative change in expected future period recoveries.
Note 6: Other Assets
Other assets consist of the following (in thousands):
March 31,
2022
December 31,
2021
Operating lease right-of-use assets$66,868 $68,812 
Real estate owned52,228 44,640 
Deferred tax assets50,689 51,451 
Identifiable intangible assets, net33,437 36,320 
Prepaid expenses28,787 26,943 
Service fee receivables22,547 22,610 
Derivative instruments13,120 3,541 
Income tax deposits 19,315 
Other56,845 61,643 
Total$324,521 $335,275 
Note 7: Borrowings
The Company is in compliance in all material respects with all covenants under its financing arrangements as of March 31, 2022. The components of the Company’s consolidated borrowings were as follows (in thousands):
March 31,
2022
December 31,
2021
Global senior secured revolving credit facility$552,379 $406,635 
Encore private placement notes97,700 107,470 
Senior secured notes1,569,282 1,613,739 
Convertible notes and exchangeable notes272,500 422,500 
Cabot securitisation senior facility459,847 473,443 
Other29,705 24,889 
Finance lease liabilities7,720 7,005 
2,989,133 3,055,681 
Less: debt discount and issuance costs, net of amortization(55,100)(58,350)
Total$2,934,033 $2,997,331 
Encore is the parent of the restricted group for the Global Senior Facility, the Senior Secured Notes and the Encore Private Placement Notes, each of which is guaranteed by the same group of material Encore subsidiaries and secured by the same collateral, which represents substantially all of the assets of those subsidiaries.
Global Senior Secured Revolving Credit Facility
In September 2020, the Company entered into a multi-currency senior secured revolving credit facility agreement (as amended and restated, the “Global Senior Facility”). On March 29, 2022, the Company amended and restated the Global Senior Facility to, among other things (1) upsize the facility by $90.0 million to $1.14 billion, (2) extend the termination date of the facility from September 2025 to September 2026, and (3) transition from LIBOR to Term SOFR for U.S. dollar borrowings.
As of March 31, 2022, the Global Senior Facility provided for a total committed facility of $1.14 billion that matures in September 2026 and includes the following key provisions:
15

Interest at Term SOFR (or EURIBOR for any loan drawn in euro or a rate based on SONIA for any loan drawn in British Pound) plus 2.50% per annum, with a Term SOFR (or EURIBOR or SONIA) floor of 0.00%;
An unused commitment fee of 0.40% per annum, payable quarterly in arrears;
A restrictive covenant that limits the LTV Ratio (defined in the Global Senior Facility) to 0.75 in the event that the Global Senior Facility is more than 20% utilized;
A restrictive covenant that limits the SSRCF LTV Ratio (defined in the Global Senior Facility) to 0.275;
A restrictive covenant that requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Global Senior Facility) of at least 2.0;
Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and
Standard events of default which, upon occurrence, may permit the lenders to terminate the Global Senior Facility and declare all amounts outstanding to be immediately due and payable.
The Global Senior Facility is secured by substantially all of the assets of the Company and the guarantors. Pursuant to the terms of an intercreditor agreement entered into with respect to the relative positions of (1) the Global Senior Facility, any super priority hedging liabilities and the Encore Private Placement Notes (collectively, “Super Senior Liabilities”) and (2) the Senior Secured Notes, Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
As of March 31, 2022, the outstanding borrowings under the Global Senior Facility were $552.4 million. The weighted average interest rate of the Global Senior Facility was 2.73% and 3.25% for the three months ended March 31, 2022 and 2021, respectively. Available capacity under the Global Senior Facility, after taking into account applicable debt covenants, was approximately $559.9 million as of March 31, 2022.
Encore Private Placement Notes
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Encore Private Placement Notes”). As of March 31, 2022, $97.7 million of the Encore Private Placement Notes remained outstanding. The Encore Private Placement Notes bear an annual interest rate of 5.625%, mature in August 2024 and require quarterly principal payments of $9.8 million. The covenants and material terms for the Encore Private Placement Notes are substantially similar to those for the Global Senior Facility.
Senior Secured Notes
The following table provides a summary of the Company’s senior secured notes (the “Senior Secured Notes”) ($ in thousands):
March 31,
2022
December 31,
2021
Maturity DateInterest Payment DatesInterest Rate
Encore 2025 Notes$387,363 $397,928 Oct 15, 2025Apr 15, Oct 154.875 %
Encore 2026 Notes394,155 405,808 Feb 15, 2026Feb 15, Aug 155.375 %
Encore 2028 Notes328,462 338,174 Jun 1, 2028Jun 1, Dec 14.250 %
Encore 2028 Floating Rate Notes
459,302 471,829 Jan 15, 2028Jan 15, Apr 15, Jul 15, Oct 15
EURIBOR +4.250%(1)
$1,569,282 $1,613,739 
_______________________
(1)Interest rate is based on three-month EURIBOR (subject to a 0% floor) plus 4.250% per annum, resets quarterly.
The Senior Secured Notes are secured by the same collateral as the Global Senior Facility and the Encore Private Placement Notes. The guarantees provided in respect of the Senior Secured Notes are pari passu with each such guarantee given in respect of the Global Senior Facility and Encore Private Placement Notes. Subject to the intercreditor agreement described above under the section “Global Senior Secured Revolving Credit Facility,” Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
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Convertible Notes and Exchangeable Notes
The following table provides a summary of the principal balance, maturity date and interest rate for the Company’s convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ($ in thousands):
March 31,
2022
December 31,
2021
Maturity DateInterest Payment DatesInterest Rate
2022 Convertible Notes$ $150,000 Mar 15, 2022Mar 15, Sep 153.250 %
2023 Exchangeable Notes172,500 172,500 Sep 1, 2023Mar 1, Sep 14.500 %
2025 Convertible Notes100,000 100,000 Oct 1, 2025Apr 1, Oct 13.250 %
$272,500 $422,500 
On March 15, 2022, the Company’s $150.0 million 2022 Convertible Notes matured. The 2022 Convertible Notes had a conversion price of $45.33. In September 2021, in accordance with the indenture for the 2022 Convertible Notes, the Company irrevocably elected “combination settlement” with a specified dollar amount equal to $1,750 per $1,000 principal amount of the 2022 Convertible Notes for all conversions of the 2022 Convertible Notes that occur on or after September 15, 2021, the free conversion date, which effectively resulted in an all cash settlement for the 2022 Convertible Notes so long as the stock price is less than $79.32 at the time of conversion. As a result, the Company settled the conversion of the 2022 Convertible Notes entirely in cash for $221.2 million, of which $71.2 million (the excess above the principal amount) represents the conversion spread and was recognized in the Company’s stockholder’s equity. No gain or loss was recognized as a result of the conversion of the 2022 Convertible Notes in the Company’s consolidated statements of income during the three months ended March 31, 2022.
The Exchangeable Notes were issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned finance subsidiary of Encore, and are fully and unconditionally guaranteed by Encore. Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by Encore Finance. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent to April 30, 2018, the date of incorporation of Encore Finance.
In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be required to make in the event that the market price of the Company’s common stock becomes greater than the conversion or exchange prices of the Convertible Notes and the Exchangeable Notes, the Company may enter into hedge programs that increase the effective conversion or exchange price for the Convertible Notes and the Exchangeable Notes. As of March 31, 2022, the Company had one hedge program that increases the effective exchange price for the 2023 Exchangeable Notes. The hedge instrument has been determined to be indexed to the Company’s own stock and meets the criteria for equity classification. The Company recorded the cost of the hedge instrument as a reduction in additional paid-in capital, and does not recognize subsequent changes in fair value of this financial instrument in its consolidated financial statement. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes.
Pursuant to certain terms in the indentures of the Company’s Convertible Notes and Exchangeable Notes, the conversion and exchange rates were adjusted upon the completion of the Company’s tender offer effective in December 2021. Certain key terms related to the convertible and exchangeable features as of March 31, 2022 are listed below ($ in thousands, except conversion or exchange price):
2023 Exchangeable Notes2025 Convertible Notes
Initial conversion or exchange price$44.62 $40.00 
Closing stock price at date of issuance$36.45 $32.00 
Closing stock price dateJul 20, 2018Sep 4, 2019
Initial conversion or exchange rate (shares per $1,000 principal amount)22.4090 25.0000 
Adjusted conversion or exchange rate (shares per $1,000 principal amount)22.5264 25.1310 
Adjusted conversion or exchange price$44.39 $39.79 
Adjusted effective conversion or exchange price(1)
$62.13 $39.79 
Excess of if-converted value compared to principal(2)
$71,256 $57,647 
Conversion or exchange date(3)
Mar 1, 2023Jul 1, 2025
_______________________
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(1)As discussed above, the Company maintains a hedge program that increases the effective exchange price for the 2023 Exchangeable Notes to $62.13.
(2)Represents the premium the Company would have to pay assuming the Convertible Notes and Exchangeable Notes were converted or exchanged on March 31, 2022 using a hypothetical conversion price based on the closing stock price on March 31, 2022. The premium of the 2023 Exchangeable Notes would have been reduced to $1.7 million with the existing hedge program.
(3)During the quarter ending December 31, 2021, the closing price of the Company’s common stock exceeded 130% of the exchange price of the 2023 Exchangeable Notes and the conversion price of the 2025 Convertible Notes for more than 20 trading days during a 30 consecutive trading day period, thereby satisfying one of the early exchange or conversion events. As a result, the 2023 Exchangeable Notes and the 2025 Convertible Notes became exchangeable or convertible on demand on January 1, 2022.
In the event of conversion or exchange, the 2025 Convertible Notes and the 2023 Exchangeable Notes are convertible or exchangeable into cash up to the aggregate principal amount of the notes and the excess conversion premium, if any, may be settled in cash or shares of the Company’s common stock at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes and Exchangeable Notes.
Interest expense related to the Convertible Notes and Exchangeable Notes was $3.7 million and $4.9 million during the three months ended March 31, 2022 and 2021, respectively.
Cabot Securitisation Senior Facility
Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, has a senior facility for a committed amount of £350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior Facility matures in September 2026. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum equal to SONIA plus a margin of 3.00% plus, for periods after September 18, 2024, a step-up margin ranging from zero to 1.00%.
As of March 31, 2022, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million (approximately $459.8 million based on an exchange rate of $1.00 to £0.76, the exchange rate as of March 31, 2022). The obligations of Cabot Securitisation under the Cabot Securitisation Senior Facility are secured by first ranking security interests over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from time to time), the book value of which was approximately £363.3 million (approximately $477.3 million based on an exchange rate of $1.00 to £0.76, the exchange rate as of March 31, 2022) as of March 31, 2022. The weighted average interest rate was 3.45% and 3.11% for the three months ended March 31, 2022 and 2021, respectively.
Cabot Securitisation is a securitized financing vehicle and is a VIE for consolidation purposes. Refer to “Note 8: Variable Interest Entities” for further details.
Note 8: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary.
As of March 31, 2022, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs which includes but is not limited to the ability to exercise discretion in the servicing of the financial assets and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.
Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the VIE.
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Note 9: Accumulated Other Comprehensive Loss
A summary of the Company’s changes in accumulated other comprehensive loss by component is presented below (in thousands):
Three Months Ended March 31, 2022
 DerivativesCurrency Translation AdjustmentsAccumulated Other Comprehensive Loss
Balance at beginning of period$516 $(54,064)$(53,548)
Other comprehensive loss before reclassification3,359 (22,254)(18,895)
Reclassification12,233  12,233 
Tax effect(3,698) (3,698)
Balance at end of period$12,410 $(76,318)$(63,908)
Three Months Ended March 31, 2021
 DerivativesCurrency Translation AdjustmentsAccumulated Other Comprehensive Loss
Balance at beginning of period$(10,154)$(58,659)$(68,813)
Other comprehensive loss before reclassification(18,145)2,889 (15,256)
Reclassification19,906