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Borrowings
 3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
Borrowings Borrowings
The Company is in compliance in all material respects with all covenants under its financing arrangements as of March 31, 2020. The components of the Company’s consolidated borrowings were as follows (in thousands):
March 31,
2020		December 31,
2019
Encore revolving credit facility$528,000  $492,000  
Encore term loan facility167,855  171,677  
Encore senior secured notes292,500  308,750  
Encore convertible notes and exchangeable notes672,855  672,855  
Less: debt discount(27,264) (30,308) 
Cabot senior secured notes1,078,965  1,129,039  
Less: debt discount(1,417) (1,604) 
Cabot senior revolving credit facility241,170  285,749  
Cabot securitisation senior facilities435,099  464,092  
Other47,924  54,151  
Finance lease liabilities8,642  8,121  
3,444,329  3,554,522  
Less: debt issuance costs, net of amortization(39,902) (41,325) 
Total$3,404,427  $3,513,197  
Encore Revolving Credit Facility and Term Loan Facility
The Company has a revolving credit facility (the “Revolving Credit Facility”) and term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”) pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”). The total commitment for the Revolving Credit Facility is $884.2 million that matures in December 2021. The Term Loan Facility matures in December 2021 and the principal amortizes $15.3 million in 2020 with the remaining principal due in 2021.
Provisions of the Restated Credit Agreement as of March 31, 2020 include, but are not limited to:
•A Revolving Credit Facility with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the cash flow leverage ratio of Encore and its restricted subsidiaries as defined in the Restated Credit Agreement; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (a) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (b) the federal funds effective rate from time to time, plus 0.5% per annum, (c) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum and (d) zero;
•A Term Loan Facility with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries;
•A borrowing base under the Revolving Credit Facility equal to 35% of all eligible non-bankruptcy estimated remaining collections plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy;
•A maximum cash flow leverage ratio permitted of 3.00:1.00;
•A maximum cash flow first-lien leverage ratio of 2.00:1.00;
•A minimum interest coverage ratio of 1.75:1.00;
•The allowance of indebtedness in the form of senior secured notes not to exceed $350.0 million;
•The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion, including junior lien indebtedness not to exceed $400.0 million;
•Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations;
•Repurchases of up to $150.0 million of Encore’s common stock and permitted indebtedness after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity;
•A pre-approved acquisition limit of $225.0 million per fiscal year;
•A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of Encore and its restricted subsidiaries; and (2) an unlimited amount such that after giving effect to the making of any investment, the cash flow leverage ratio is less than 1.25:1:00;
•A basket to allow for investments in persons organized under the laws of Canada in the amount of $50.0 million;
•Collateralization by all assets of the Company, other than the assets of certain foreign subsidiaries and all unrestricted subsidiaries as defined in the Restated Credit Agreement.
As of March 31, 2020, the outstanding balance under the Revolving Credit Facility was $528.0 million, which bore a weighted average interest rate of 4.58% and 5.50% for the three months ended March 31, 2020 and 2019, respectively. Available capacity under the Revolving Credit Facility, after taking into account borrowing base and applicable debt covenants, was $356.2 million as of March 31, 2020. As of March 31, 2020, the outstanding balance under the Term Loan Facility was $167.9 million.
Encore Senior Secured Notes
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Senior Secured Notes”). The Senior Secured Notes bear an annual interest rate of 5.625%, mature in 2024 and beginning in November 2019, require quarterly principal payments of $16.3 million. As of March 31, 2020, $292.5 million of the Senior Secured Notes remained outstanding.
The covenants and material terms in the purchase agreement for the Senior Secured Notes are substantially similar to those in the Restated Credit Agreement.
Encore Convertible Notes and Exchangeable Notes
The following table provides a summary of the principal balance, maturity date and interest rate for the Company’s convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ($ in thousands):
March 31,
2020		December 31,
2019		Maturity dateInterest rate
2020 Convertible Notes$89,355  $89,355  Jul 1, 20203.000 %
2021 Convertible Notes161,000  161,000  Mar 15, 20212.875 %
2022 Convertible Notes150,000  150,000  Mar 15, 20223.250 %
Exchangeable Notes172,500  172,500  Sep 1, 20234.500 %
2025 Convertible Notes100,000  100,000  Oct 1, 20253.250 %
$672,855  $672,855  
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 the incorporation of Encore Finance.
Prior to the close of business on the business day immediately preceding their respective conversion or exchange date (listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances set forth in the applicable indentures. On or after their respective conversion or exchange dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their notes at any time. Certain key terms related to the convertible and exchangeable features as of March 31, 2020 are listed below:
2020 Convertible Notes2021 Convertible Notes2022 Convertible Notes2023 Exchangeable Notes2025 Convertible Notes
Initial conversion or exchange price$45.72  $59.39  $45.57  $44.62  $40.00  
Closing stock price at date of issuance$33.35  $47.51  $35.05  $36.45  $32.00  
Closing stock price dateJun 24, 2013Mar 5, 2014Feb 27, 2017Jul 20, 2018Sep 4, 2019
Conversion or exchange rate (shares per $1,000 principal amount)21.8718  16.8386  21.9467  22.4090  25.0000  
Conversion or exchange dateJan 1, 2020Sep 15, 2020Sep 15, 2021Mar 1, 2023Jul 1, 2025
In the event of conversion or exchange, holders of the Company’s Convertible Notes or Exchangeable Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions and exchanges through combination settlement (i.e., convertible or exchangeable into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and 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, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion or exchange spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion or exchange spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion or exchange prices listed in the above table.
The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes and Exchangeable Notes at the time of the original offering are listed below (in thousands, except percentages):
2020 Convertible Notes(1)
2021 Convertible Notes2022 Convertible Notes2023 Exchangeable Notes2025 Convertible Notes
Debt component$140,247  $143,645  $137,266  $157,971  $91,024  
Equity component$32,253  $17,355  $12,734  $14,009  $8,976  
Equity issuance cost$1,106  $581  $398  $—  $224  
Stated interest rate3.000 %2.875 %3.250 %4.500 %3.250 %
Effective interest rate6.350 %4.700 %5.200 %6.500 %5.000 %
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(1)The Company used a portion of the net proceeds from the issuance of the 2025 Convertible Notes to repurchase approximately $83.1 million aggregate principal amount of its 2020 Convertible Notes. As a result, the remaining principal amount of the 2020 Convertible Notes was $89.4 million as of March 31, 2020.
The balances of the liability and equity components of all the Convertible Notes and Exchangeable Notes outstanding were as follows (in thousands):
March 31,
2020		December 31,
2019
Liability component—principal amount$672,855  $672,855  
Unamortized debt discount(27,264) (30,308) 
Liability component—net carrying amount$645,591  $642,547  
Equity component$83,127  $83,127  
The debt discount is being amortized into interest expense over the remaining life of the Convertible Notes and Exchangeable Notes using the effective interest rates. Interest expense related to the Convertible Notes and Exchangeable Notes was as follows (in thousands):
Three Months Ended March 31,
20202019
Interest expense—stated coupon rate$5,799  $5,337  
Interest expense—amortization of debt discount3,044  3,121  
Interest expense—Convertible Notes and Exchangeable Notes$8,843  $8,458  
Hedge Transactions
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 maintains a hedge program that increases the effective conversion or exchange price for the 2020 Convertible Notes, the 2021 Convertible Notes and the Exchangeable Notes. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes.
The details of the hedge program are listed below (in thousands, except conversion price):
2020 Convertible Notes2021 Convertible Notes2023 Exchangeable Notes
Cost of the hedge transaction(s)$18,113  $19,545  $17,785  
Initial conversion or exchange price$45.72  $59.39  $44.62  
Effective conversion or exchange price$61.55  $83.14  $62.48  
Cabot Senior Secured Notes
The following table provides a summary of the Cabot senior secured notes ($ in thousands):
March 31,
2020		December 31,
2019		Maturity dateInterest rate
Floating rate senior secured notes due 2024$441,336  $448,921  Jun 1, 2024
EURIBOR +6.375%
Senior secured notes due 2023637,629  680,118  Oct 1, 20237.500 %
$1,078,965  $1,129,039  
Interest expense related to the Cabot senior secured notes was as follows (in thousands):
 Three Months Ended March 31,
20202019
Interest expense—stated coupon rate$19,417  $19,394  
Interest expense—amortization of debt discount85  202  
Interest expense—Cabot senior secured notes$19,502  $19,596  
Cabot Senior Revolving Credit Facility
Cabot Financial (UK) Limited (“Cabot Financial UK”) has an amended and restated senior secured revolving credit facility agreement (as amended and restated, the “Cabot Credit Facility”). As of March 31, 2020, the Cabot Credit Facility provided for a total committed facility of £375.0 million that expires in September 2023 and included the following key provisions:
•Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.00% per annum;
•A restrictive covenant that limits the loan to value ratio to 0.75 in the event that the Cabot Credit Facility is more than 20% utilized;
•A restrictive covenant that limits the super senior loan (i.e., the Cabot Credit Facility and any super priority hedging liabilities) to value ratio to 0.275; and
•Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens.
As of March 31, 2020, the outstanding borrowings under the Cabot Credit Facility were £194.0 million (approximately $241.2 million). The weighted average interest rate was 3.55% and 3.37% for the three months ended March 31, 2020 and 2019, respectively. Available capacity under the Cabot Credit Facility, after taking into account borrowing base and applicable debt covenants, was £181.0 million (approximately $225.0 million) as of March 31, 2020.
Cabot Securitisation Senior Facility
Cabot’s wholly owned subsidiary Cabot Securitisation UK Ltd (“Cabot Securitisation”) entered into a senior facility agreement (the “Senior Facility Agreement”) for a committed amount of £300.0 million. In November 2018, Cabot’s wholly owned subsidiary Cabot Securitisation UK II Ltd (“Cabot Securitisation II”) entered into a non-recourse asset backed senior facility of £50.0 million.
On February 18, 2020, Cabot Securitisation amended and restated its Senior Facility Agreement. Pursuant to the amendment and restatement of the Senior Facility Agreement, the total commitment amount was increased by £50.0 million from £300.0 million to £350.0 million, the repayment date was extended from September 15, 2023 to March 15, 2025 and SONIA replaced LIBOR as the reference rate. Funds drawn under the amended and restated Senior Facility Agreement bear interest at a rate per annum equal to SONIA plus a margin of 3.06% plus, for periods after March 15, 2023, a step-up margin ranging from zero to 1.00%. Cabot Securitisation has drawn down the additional £50.0 million and used the proceeds to purchase receivables from Cabot Securitisation II in order to effect the termination of the £50.0 million senior facility of Cabot Securitisation II.
As of March 31, 2020, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million (approximately $435.1 million). The obligations of Cabot Securitisation under the Senior Facility Agreement 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 £377.6 million (approximately
$469.4 million) as of March 31, 2020. The weighted average interest rate was 3.52% and 3.76% for the three months ended March 31, 2020 and 2019 respectively.
Cabot Securitisation and Cabot Securitisation II are securitized financing vehicles and are VIEs for consolidation purposes. Refer to “Note 9: Variable Interest Entities”, for further details.