Investment in Receivable Portfolios, Net

In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g., FICO or similar scores), 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 region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.

In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. With gross collections being discounted at monthly IRRs, when collections are lower in the near term, even if substantially higher collections are expected later in the collection curve, an allowance charge could result.

The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. During the quarter ended September 30, 2016, the Company revised the forecasting methodology it uses to value and calculate IRRs on certain portfolios in Europe by extending the collection forecast from 120 months to 180 months. This change was made as a result of (1) the Company having observed that older portfolios in Europe have consistently experienced cash collections beyond 120 months, (2) an expectation that regulatory changes in the United Kingdom resulting in a reduction in the number of highly discounted near term one-time settlements, an increase in the number of payment plans, and an increase in the length of existing payment plans will cause a lengthening of the collections curve, (3) an expectation that, as a result of a higher percentage of semi-performing account purchases in the United Kingdom in recent years, newer vintages will have a larger percentage of collections after 120 months and (4) the Company’s increased confidence in its ability to forecast future cash collections to 180 months. The increase in the collection forecast from 120 months to 180 months was applied effective July 1, 2016 to certain portfolios in Europe for which the Company could accurately forecast through such term. These changes in forecasted future cash flows resulted in an increase in the aggregate total estimated remaining collections for the receivable portfolios of approximately $296.5 million as of September 30, 2016. In addition, during the three months ended September 30, 2016, the Company recorded allowance charges of approximately $94.0 million resulting from delays or shortfalls in near term collections against the forecasts for certain pools in Europe. Subsequent to the recording of the allowance charges for certain pools in Europe, the Company has experienced sustained improvements in collections resulting primarily from its liquidation improvement initiatives. As a result, during the three months ended June 30, 2017, the Company reversed approximately $7.8 million of the previously recorded allowance charges for certain pools in Europe and raised IRRs for certain other pool groups in Europe.

The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios, and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances.

If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the carrying value of a Cost Recovery Portfolio has been fully recovered.

Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.

The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):



	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
Balance at December 31, 2016	$	3,092,004		$	365,504		$	3,457,508
Revenue recognized, net	(211,718		)	(40,252		)	(251,970		)
(Reductions) additions on existing portfolios, net	(90,138		)	57,446			(32,692		)
Additions for current purchases, net	200,728			—			200,728
Effect of foreign currency translation	38,712			467			39,179
Balance at March 31, 2017	3,029,588			383,165			3,412,753
Revenue recognized, net	(231,431		)	(40,805		)	(272,236		)
Net additions on existing portfolios	225,021			9,888			234,909
Additions for current purchases, net	258,687			—			258,687
Effect of foreign currency translation	66,927			(753		)	66,174
Balance at June 30, 2017	$	3,348,792		$	351,495		$	3,700,287



	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
Balance at December 31, 2015	$	3,047,640		$	223,031		$	3,270,671
Revenue recognized, net	(238,547		)	(31,547		)	(270,094		)
Net additions on existing portfolios	39,538			8,071			47,609
Additions for current purchases, net	193,654			—			193,654
Effect of foreign currency translation	(64,330		)	470			(63,860		)
Balance at March 31, 2016	2,977,955			200,025			3,177,980
Revenue recognized, net	(233,714		)	(33,738		)	(267,452		)
Net additions on existing portfolios	59,459			95,135			154,594
Additions for current purchases, net	183,217			—			183,217
Effect of foreign currency translation	(181,223		)	245			(180,978		)
Balance at June 30, 2016	$	2,805,694		$	261,667		$	3,067,361

During the three months ended June 30, 2017, the Company purchased receivable portfolios with a face value of $2.4 billion for $246.4 million, or a purchase cost of 10.1% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended June 30, 2017 amounted to $505.0 million. During the three months ended June 30, 2016, the Company purchased receivable portfolios with a face value of $2.8 billion for $233.1 million, or a purchase cost of 8.2% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended June 30, 2016 amounted to $416.9 million.

During the six months ended June 30, 2017, the Company purchased receivable portfolios with a face value of $4.1 billion for $465.1 million, or a purchase cost of 11.3% of face value. The estimated future collections at acquisition for all portfolios purchased during the six months ended June 30, 2017 amounted to $924.4 million. During the six months ended June 30, 2016, the Company purchased receivable portfolios with a face value of $6.4 billion for $489.9 million, or a purchase cost of 7.7% of face value. The estimated future collections at acquisition for all portfolios purchased during the six months ended June 30, 2016 amounted to $875.5 million.

All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended June 30, 2017 and 2016, Zero Basis Revenue was approximately $40.8 million and $33.7 million, respectively. During the six months ended June 30, 2017 and 2016, Zero Basis Revenue was approximately $81.1 million and $65.3 million, respectively.

The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages):



	Three Months Ended June 30, 2017
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,422,299		$	13,719		$	—		$	2,436,018
Purchases of receivable portfolios	245,246			1,169			—			246,415
Disposals or transfers to held for sale	(2,697		)	—			—			(2,697		)
Gross collections⁽¹⁾	(404,918		)	(459		)	(40,805		)	(446,182		)
Put-backs and Recalls⁽²⁾	(3,237		)	—			—			(3,237		)
Foreign currency adjustments	53,466			(94		)	—			53,372
Revenue recognized	224,310			—			39,097			263,407
Portfolio allowance reversals, net	7,121			—			1,708			8,829
Balance, end of period	$	2,541,590		$	14,335		$	—		$	2,555,925
Revenue as a percentage of collections⁽³⁾	55.4		%	0.0		%	95.8		%	59.0		%

	Three Months Ended June 30, 2016
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,482,855		$	4,123		$	—		$	2,486,978
Purchases of receivable portfolios	233,116			—			—			233,116
Transfer of portfolios	(96		)	96			—			—
Disposals or transfers to held for sale	—			—			—			—
Gross collections⁽¹⁾	(399,498		)	(724		)	(33,878		)	(434,100		)
Put-backs and Recalls⁽²⁾	(3,692		)	(5		)	140			(3,557		)
Foreign currency adjustments	(80,432		)	136			—			(80,296		)
Revenue recognized	233,010			—			31,963			264,973
Portfolio allowance reversals, net	704			—			1,775			2,479
Balance, end of period	$	2,465,967		$	3,626		$	—		$	2,469,593
Revenue as a percentage of collections⁽³⁾	58.3		%	0.0		%	94.3		%	61.0		%

________________________


(1)	Does not include amounts collected on behalf of others.


(2)	Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).


(3)	Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.



	Six Months Ended June 30, 2017
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,368,366		$	14,443		$	—		$	2,382,809
Purchases of receivable portfolios	463,973			1,169			—			465,142
Disposals or transfers to held for sale	(7,468		)	—			—			(7,468		)
Gross collections⁽¹⁾	(804,922		)	(1,099		)	(81,024		)	(887,045		)
Put-backs and Recalls⁽²⁾	(4,994		)	—			(33		)	(5,027		)
Foreign currency adjustments	83,486			(178		)	—			83,308
Revenue recognized	435,415			—			77,830			513,245
Portfolio allowance reversals, net	7,734			—			3,227			10,961
Balance, end of period	$	2,541,590		$	14,335		$	—		$	2,555,925
Revenue as a percentage of collections⁽³⁾	54.1		%	0.0		%	96.1		%	57.9		%

	Six Months Ended June 30, 2016
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,436,054		$	4,615		$	—		$	2,440,669
Purchases of receivable portfolios	489,869			—			—			489,869
Gross collections⁽¹⁾	(815,225		)	(1,357		)	(65,323		)	(881,905		)
Put-backs and Recalls⁽²⁾	(16,577		)	(11		)	38			(16,550		)
Foreign currency adjustments	(100,319		)	283			—			(100,036		)
Revenue recognized	471,088			—			61,788			532,876
Portfolio allowance reversals, net	1,173			—			3,497			4,670
Balance, end of period	$	2,465,967		$	3,626		$	—		$	2,469,593
Revenue as a percentage of collections⁽³⁾	57.8		%	0.0		%	94.6		%	60.4		%

________________________


(1)	Does not include amounts collected on behalf of others.


(2)	Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).


(3)	Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.

The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands):



	Valuation Allowance
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Balance at beginning of period	$	136,325		$	58,397		$	137,037		$	60,588
Provision for portfolio allowances	682			—			682			—
Reversal of prior allowances	(9,511		)	(2,479		)	(11,643		)	(4,670		)
Effect of foreign currency translation	3,179			—			4,599			—
Balance at end of period	$	130,675		$	55,918		$	130,675		$	55,918