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Investment in Receivable Portfolios, Net
 9 Months Ended
Sep. 30, 2017
Receivables [Abstract]  
Investment in Receivable Portfolios, Net
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 and nine months ended September 30, 2017, the Company reversed approximately $28.0 million and $35.8 million, respectively of the previously recorded allowance charges for certain pool groups in Europe and raised IRRs for certain other pool groups in Europe.
Additionally, during the three months ended September 30, 2017, the Company recorded an allowance charge of $10.2 million on two pool groups in the United States that were heavily concentrated in Puerto Rico for which collections have been impacted as a result of hurricanes.
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

Revenue recognized, net
(248,220
)
 
(35,368
)
 
(283,588
)
Net additions on existing portfolios
27,162

 
1,539

 
28,701

Additions for current purchases, net
336,725

 
—

 
336,725

Effect of foreign currency translation
56,971

 
375

 
57,346

Balance at September 30, 2017
$
3,521,430

 
$
318,041

 
$
3,839,471

 
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

Revenue recognized, net
(119,543
)
 
(39,991
)
 
(159,534
)
Net additions on existing portfolios
299,212

 
22,862

 
322,074

Additions for current purchases, net
180,079

 
—

 
180,079

Effect of foreign currency translation
(75,402
)
 
135

 
(75,267
)
Balance at September 30, 2016
$
3,090,040

 
$
244,673

 
$
3,334,713


During the three months ended September 30, 2017, the Company purchased receivable portfolios with a face value of $3.0 billion for $292.3 million, or a purchase cost of 9.7% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended September 30, 2017 amounted to $630.6 million. During the three months ended September 30, 2016, the Company purchased receivable portfolios with a face value of $1.5 billion for $206.4 million, or a purchase cost of 14.0% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended September 30, 2016 amounted to $386.5 million.
During the nine months ended September 30, 2017, the Company purchased receivable portfolios with a face value of $7.1 billion for $757.5 million, or a purchase cost of 10.6% of face value. The estimated future collections at acquisition for all portfolios purchased during the nine months ended September 30, 2017 amounted to $1,555.0 million. During the nine months ended September 30, 2016, the Company purchased receivable portfolios with a face value of $7.9 billion for $696.2 million, or a purchase cost of 8.9% of face value. The estimated future collections at acquisition for all portfolios purchased during the nine months ended September 30, 2016 amounted to $1,262.0 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 September 30, 2017 and 2016, Zero Basis Revenue was approximately $35.4 million and $40.0 million, respectively. During the nine months ended September 30, 2017 and 2016, Zero Basis Revenue was approximately $116.4 million and $105.3 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 September 30, 2017
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,541,590

 
$
14,335

 
$
—

 
$
2,555,925

Purchases of receivable portfolios
292,332

 
—

 
—

 
292,332

Disposals or transfers to held for sale
(3,536
)
 
(265
)
 
—

 
(3,801
)
Gross collections(1)
(407,435
)
 
(435
)
 
(35,126
)
 
(442,996
)
Put-backs and Recalls(2)
(407
)
 
—

 
(242
)
 
(649
)
Foreign currency adjustments
44,366

 
46

 
—

 
44,412

Revenue recognized
230,403

 
—

 
33,621

 
264,024

Portfolio allowance reversals, net
17,817

 
—

 
1,747

 
19,564

Balance, end of period
$
2,715,130

 
$
13,681

 
$
—

 
$
2,728,811

Revenue as a percentage of collections(3)
56.5
%
 
0.0
%
 
95.7
%
 
59.6
%
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,465,967

 
$
3,626

 
$
—

 
$
2,469,593

Purchases of receivable portfolios
206,359

 
—

 
—

 
206,359

Gross collections(1)
(366,321
)
 
(706
)
 
(39,934
)
 
(406,961
)
Put-backs and Recalls(2)
(3,103
)
 
—

 
(57
)
 
(3,160
)
Foreign currency adjustments
(27,361
)
 
(173
)
 
—

 
(27,534
)
Revenue recognized
212,664

 
—

 
38,317

 
250,981

Portfolio (allowance) reversals, net
(93,121
)
 
—

 
1,674

 
(91,447
)
Balance, end of period
$
2,395,084

 
$
2,747

 
$
—

 
$
2,397,831

Revenue as a percentage of collections(3)
58.1
%
 
0.0
%
 
96.0
%
 
61.7
%
________________________
(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.

 
Nine Months Ended September 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
756,305

 
1,169

 
—

 
757,474

Disposals or transfers to held for sale
(11,004
)
 
(265
)
 
—

 
(11,269
)
Gross collections(1)
(1,212,357
)
 
(1,534
)
 
(116,150
)
 
(1,330,041
)
Put-backs and Recalls(2)
(5,401
)
 
—

 
(275
)
 
(5,676
)
Foreign currency adjustments
127,852

 
(132
)
 
—

 
127,720

Revenue recognized
665,818

 
—

 
111,451

 
777,269

Portfolio allowance reversals, net
25,551

 
—

 
4,974

 
30,525

Balance, end of period
$
2,715,130

 
$
13,681

 
$
—

 
$
2,728,811

Revenue as a percentage of collections(3)
54.9
%
 
0.0
%
 
96.0
%
 
58.4
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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
696,228

 
—

 
—

 
696,228

Transfer of portfolios
(96
)
 
96

 
—

 
—

Gross collections(1)
(1,181,546
)
 
(2,063
)
 
(105,257
)
 
(1,288,866
)
Put-backs and Recalls(2)
(19,680
)
 
(11
)
 
(19
)
 
(19,710
)
Foreign currency adjustments
(127,680
)
 
110

 
—

 
(127,570
)
Revenue recognized
683,752

 
—

 
100,105

 
783,857

Portfolio (allowance) reversals, net
(91,948
)
 
—

 
5,171

 
(86,777
)
Balance, end of period
$
2,395,084

 
$
2,747

 
$
—

 
$
2,397,831

Revenue as a percentage of collections(3)
57.9
%
 
0.0
%
 
95.1
%
 
60.8
%
________________________
(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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
130,675

 
$
55,918

 
$
137,037

 
$
60,588

Provision for portfolio allowances
10,181

 
94,011

 
10,863

 
94,011

Reversal of prior allowances
(29,745
)
 
(2,564
)
 
(41,388
)
 
(7,234
)
Effect of foreign currency translation
1,759

 
(2,890
)
 
6,358

 
(2,890
)
Balance at end of period
$
112,870

 
$
144,475

 
$
112,870

 
$
144,475