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CABOT CREDIT MANAGEMENT Financial Results For the three months - - PowerPoint PPT Presentation

CABOT CREDIT MANAGEMENT Financial Results For the three months ended 31 March 2019 9 May 2019 Proprietary and Confidential DISCLAIMER This presentation has been prepared by Cabot Credit Management (the Company) solely for informational


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CABOT CREDIT MANAGEMENT Financial Results

For the three months ended 31 March 2019

Proprietary and Confidential

9 May 2019

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SLIDE 2

DISCLAIMER

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Proprietary and Confidential This presentation has been prepared by Cabot Credit Management (“the Company”) solely for informational purposes. For the purposes of this disclaimer, the presentation that follows shall mean and include the slides that follow, the oral presentation of the slides by the Company or any person on their behalf, any question-and-answer session that follows the oral presentation, hard copies of this document and any materials distributed in connection with the

  • presentation. By attending the meeting at which the presentation is made, dialling into the teleconference during which the presentation is made or reading

the presentation, you will be deemed to have agreed to all of the restrictions that apply with regard to the presentation and acknowledged that you understand the legal and regulatory sanctions attached to the misuse, disclosure or improper circulation of the presentation. The Company has included non-IFRS financial measures in this presentation. These measurements may not be comparable to those of other companies. Reference to these non-IFRS financial measures should be considered in addition to IFRS financial measures, but should not be considered a substitute for results that are presented in accordance with IFRS. The information contained in this presentation has not been subject to any independent audit or review. A significant portion of the information contained in this document, including all market data and trend information, is based on estimates or expectations of the Company, and there can be no assurance that these estimates or expectations are or will prove to be accurate. Our internal estimates have not been verified by an external expert, and we cannot guarantee that a third party using different methods to assemble, analyze or compute market information and data would obtain or generate the same

  • results. We have not verified the accuracy of such information, data or predictions contained in this report that were taken or derived from industry

publications, public documents of our competitors or other external sources. Further, our competitors may define our and their markets differently than we

  • do. In addition, past performance of the Company is not indicative of future performance. The future performance of the Company will depend on numerous

factors which are subject to uncertainty. Certain statements contained in this document that are not statements of historical fact, including, without limitation, any statements preceded by, followed by or including the words “targets,” “believes,” “expects,” “aims,” “intends,” “may,” “anticipates,” “would,” “could” or similar expressions or the negative thereof, constitute forward-looking statements, notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements. Examples of forward-looking statements include, but are not limited to: (i) statements about future financial and

  • perating results; (ii) statements of strategic objectives, business prospects, future financial condition, budgets, potential synergies to be derived from

acquisitions, projected levels of production, projected costs and projected levels of revenues and profits of the Company or its management or board of directors; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict and outside of the control of the management of the Company. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We have based these assumptions on information currently available to us, if any one or more of these assumptions turn out to be incorrect, actual market results may differ from those predicted. While we do not know what impact any such differences may have on our business, if there are such differences, our future results of operations and financial condition, and the market price of the notes, could be materially adversely affected. You should not place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements referenced

  • above. Forward-looking statements speak only as of the date on which such statements are made. The Company expressly disclaims any obligation or

undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events. The presentation does not constitute or form part of, and should not be construed as, an offer to sell or issue, or the solicitation of an offer to purchase, subscribe to or acquire the Company or the Company’s securities, or an inducement to enter into investment activity. No part of this presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This presentation is not for publication, release or distribution..

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TODAY’S PRESENTERS

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Proprietary and Confidential

  • Joined Cabot Group in April 2012
  • 20+ years’ experience in Financial Services
  • Previous roles:
  • Joined Cabot Group in January 2016
  • 20+ years’ Finance experience
  • Previous roles:

Managing Director – Credit Cards Managing Director – UK and S.Africa Head of European Operations PricewaterhouseCoopers Managing Director – Audit, Europe and Asia CFO – Italy Controller – UK Bank

Craig Buick

Chief Financial Officer

Ken Stannard

Chief Executive Officer

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SLIDE 4

AGENDA

  • Key highlights of Q1 2019
  • Financial review
  • Outlook
  • Q & A

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Proprietary and Confidential

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SLIDE 5

KEY HIGHLIGHTS OF Q1 2019

Proprietary and Confidential

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DELIVERED STRONG Q1 FINANCIAL PERFORMANCE

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Proprietary and Confidential

DP Collections

(YTD Mar ‘18: £109.1m)

£117.5m

Servicing revenues

(YTD Mar ‘18: £19.8m)

£21.6m

Portfolio acquisitions

(YTD Mar ‘18: £49.5m)

£64.8m

+8% +9% +31%

Adjusted EBITDA

(YTD Mar ‘18: £79.6)

£90.1m

120-Month ERC

(March 2018: £2.4bn)

£2.7bn

Leverage

(March 2018: 4.1x )

3.9x

+13% +13%

  • 0.2x
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SLIDE 7

FINANCIAL REVIEW

Proprietary and Confidential

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SLIDE 8

CONTROLLED GROWTH IN REVENUE AND PROFITABILITY

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Proprietary and Confidential

22% year over year increase in LTM revenue

275 281 288 299 308 53 67 79 82 84 332 353 373 393 405 16% 19% 21% 21% 21%

  • 5%

0% 5% 10% 15% 20% 25% 30% 35% 40% LTM Q118 LTM Q218 LTM Q318 LTM Q418 LTM Q119

  • 50

100 150 200 250 300 350 400 450 DP Revenue Servicing Revenue Other Revenue Servicing % of Total (£’m)

17% year over year increase in LTM Adjusted EBITDA

307 318 329 350 360 64% 63% 62% 63% 64% 40% 45% 50% 55% 60% 65% 70% 75% 80%

  • 50,000

100,000 150,000 200,000 250,000 300,000 350,000 400,000

LTM Q118 LTM Q218 LTM Q318 LTM Q418 LTM Q119 Adjusted EBITDA Adj EBITDA Margin (£’m)

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SLIDE 9

30 13 58 25 39 20 79 28 58 24 18 50 110 86 87 65 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Paying Non-Paying Secured (£’m) 2,370 2,680 2,380 2,682 2017 2018 Q1 18 Q1 19 (£’m)

91% 9%

YTD Q1'18 - £50m

UK Europe 96% 4%

YTD Q1'19 £65m

UK Europe

UK, 80% Europe, 20%

ERC GROWTH DRIVEN BY RECORD 2018 CAPITAL DEPLOYMENTS

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Capital deployed – LTM £349m 120 month ERC growth

+13%

Capital deployed by geography 120m ERC by region

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33% 38% Q1 18 Q1 19 67% 62% Q1 18 Q1 19 2.0 2.2 Q1 18 Q1 19 1.6 1.6 Q1 18 Q1 19

Paying Portfolios

EARLY SIGNS OF TENTATIVE IMPROVEMENT IN RETURNS IN UK MARKET

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Proprietary and Confidential

UK capital deployed by portfolio type UK 120 month gross money multiples

Non-Paying Portfolios

UK 120 Month Money Multiples: 1.78x 1.83x

  • Focussed on deploying capital to deliver optimal long term risk adjusted returns
  • Forward flows represented 56% of Q1’19 purchases. Forward flow commitments reduced from £116m at Q1’8 to £16m

at Q1’19 in order to be able to deploy capital more effectively if recent pricing developments continue

  • Q1’19 spot sales at marginally better returns than historic forward flow levels
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SLIDE 11

Q1'18 Q1'19 Change LTM reported Adj EBITDA 307 360 53 Annualised cash interest (78) (82) (4) 43 Annualised capex and tax (15) (21) (6) ERC replenishment rate (150) (180) (30) Excess cash generation 64 77 13

£3.1bn

CONSISTENT, RELIABLE CASH FLOW GENERATION IN EXCESS OF ERC REPLENISHMENT NEEDS

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Distribution of 180m Gross ERC by period as of 31-Mar-2019

£2.7bn

120 month ERC 180 month ERC

Consistent collection outperformance

  • vs. historic ERC forecasts

Growth in cash margins exceeds growth in ERC replenishment rate

  • Performance against ERC forecast published 12 months prior to the date shown
  • £53m growth in reported Adjusted EBITDA over last 12

months

  • Excess cash generation ~ 21% of cash profits

480 422 356 303 262 227 196 168 146 121 98 88 78 70 63 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10 Yr11 Yr12 Yr13 Yr14 Yr15 (£’m) 103% 102% 100% 101% 101% Q118 Q218 Q318 Q418 Q119

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ROBUST PERFORMANCE OF UK BACK BOOK DURING THE FINANCIAL CRISIS

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Proprietary and Confidential

Monthly Historical Collections for Pre-crisis Vintages Rolling 12M Breakage Rates Evolution

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Source: Company information. Office of National Statistics 1. UK Only

Monthly collections (£m) UK unemployment rate

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% £0.0 £0.5 £1.0 £1.5 £2.0 £2.5 £3.0 £3.5 £4.0 £4.5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2006 2007 UK unemployment rate 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 2006 2007 2008 2009 2010 2011 2012 2013 Rolling 12M breakage rate Period of rising unemployment

1

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SLIDE 13

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Proprietary and Confidential

DIFFERENTIAL PERFORMANCE OF PRE CRISIS VINTAGE AGAINST PRICING EXPECTATIONS – SETTLEMENTS VS REGULAR PAYERS

Cabot + Marlin UK portfolios originated in 2005

Cumulative performance of 2005 vintage against pricing expectations

  • Overall cumulative performance at 97% of pricing expectations as at Q1’19, with incremental future

collections expected

  • Cash flow tail continues to generate incremental value today – £2.3m collected against this vintage in

past 12 months (4.6% of original investment value)

  • Resilience of regular payers demonstrated during financial crisis
  • Profile of recent collections indicates materially lower impact expected from today’s back book in the

event of a future stress event

78% 111% 97% Settlements Regular payers Total

32% 68% xx% % of actual lifetime cash collections

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CURRENT COLLECTIONS PROFILE INDICATES LOWER EXPECTED EXPOSURE TO ECONOMIC STRESS THAN BEFORE FINANCIAL CRISIS

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Proprietary and Confidential

Analysis of 2006 UK cash collections Analysis of 2018 UK cash collections

Characteristics of cash collected in 2018 is significantly different to pre financial crisis experience: 1. Payers represent a higher proportion of overall cash collections in 2018 (72%, vs 60% in 2006) 2. Settlement cash (28%) in 2018 is a significantly lower proportion of total collections compared to 2006 (40%) 3. Settlements from payers considered a timing matter whereby total lifetime cash collections expectation from payers remains whether via regular payments or settlements. 4. Settlement cash arising from litigation activity considered to be uncorrelated to macro stress events 5. Other settlement cash which may be impacted by macro stress events is materially lower now than in 2006 (6% of overall UK collections vs 23%)

1 1

100 40 40 26 23 (60) (14) (3)

Total collections Payers Total settlements cash Setttlement cash from payers Settlement cash from non-payers Settlement cash arising from litigation Other settlement cash

100 28 28 12 12 6 6 (72) (16) (6)

Total collections Payers Total settlements cash Setttlement cash from payers Settlement cash from non-payers Settlement cash arising from litigation Other settlement cash

(1) Total collections rebased to 100 1 1

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HISTORIC DATA INDICATES LIMITED IMPACT OF INTEREST RATE STRESS ON PORTFOLIO PERFORMANCE

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Proprietary and Confidential

Background Comparison of key payment behaviours

  • Cabot identified ~7,300 in Q3’16 who rolled

from fixed rate to variable rate mortgage product

  • Average monthly instalments increased from

avg £910 per month to £1,030 – equivalent to 200bps interest rate shock

  • Payment behaviour of this pool of customers
  • ver subsequent year compared to existing pool
  • f fixed rate mortgage holders

Portfolio Stratification – Paying Accounts Projected impact on ERC

Applying these amended customer payment behaviours from a sudden 200bps interest rate shock to the entire population of mortgage holders within the portfolio indicates a potential reduction in 84 month ERC of approx. 1.4%

Fixed rate mortgages 13% Variable rate mortgages 15% Other mortgages 8% No mortgage 64% 0% 2% 4% 6% 8% 10% Annual Default Rate Annual Settment Rate Annual Non Payer to Payer Rate Remained on Fixed Rates Fixed to Variable 200bp Shock

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  • Prudent leverage and strong liquidity to support the

business

  • Improvement in all key credit metrics over past year

 Reduced leverage to 3.9x vs. 4.1x in Q4 2018  LTV: Consistent at 63%  Strengthened FCCR to 4.4x vs. 4.2x in Q4 2018

  • Available liquidity: £176m
  • Weighted average cost of debt 5.7%
  • Leverage target of 3.0x – 3.5x by the end of 2021
  • Expect leverage in 3.5x – 4.0x range by end of 2019

DELIVERING UPON DELEVERAGING COMMITMENT

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Proprietary and Confidential

Net debt as of 31-Mar-2019 (£m) Bonds 860 ABL 350 RCF and other loans 250 Cash available (37) Net Debt 1,423 84 months ERC 2,247 LTM Adjusted EBITDA 360.3 LTV 63% FCCR 4.4x Net Debt / Adjusted EBITDA 3.9x Leverage Trend

4.6 4.6 4.4 4.2 4.1 4.1 4.2 4.2 4.1 4.2 4.2 4.1 3.9 Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Q119

(1) £385m RCF less drawn amount of £245.3m plus cash available of £36.7m

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OUTLOOK

Proprietary and Confidential

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OUTLOOK

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  • Continued focus on “Being the Best at What We Do” and delivering on our mission of helping each and

every customer to achieve their own financial recovery

  • Seize the opportunities that being part of Encore – following the acquisition of Cabot, the world’s

largest debt purchaser – brings. Leverage this scale and expertise to maintain our competitive advantage, drive customer and compliance leadership, & maximise our financial strength

  • Capture significant UK servicing and BPO opportunities in order to deliver long term profitable revenue

streams, whilst further strengthening existing client relationships

  • Focus to deliver on deleveraging commitment of 3.0x – 3.5x by the end of 2021
  • Monitor Brexit consequences on the UK economy and potential impact on our customers
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Q & A

Proprietary and Confidential

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APPENDICES

Proprietary and Confidential

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APPENDIX 1: PROFIT AND LOSS

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Proprietary and Confidential

Reconciliation of Q1 2019 IFRS Reported Net Income

ECONOMIC P&L £m Total Non- recurring * Underlying Guide Collections on owned loan portfolios 117.5

  • 117.5

(a) Servicing revenue 21.6

  • 21.6

(b) Other income 2.1

  • 2.1

(c) Gross revenue 141.2

  • 141.2

(d) Recurring opex (excl. D&A) (51.1)

  • (51.1)

(e) Adj EBITDA 90.1

  • 90.1

(f) Share-based payment 0.2

  • 0.2

(g) Book value of portfolio assets sold

  • (h)

Book value of REO assets sold (1.1)

  • (1.1)

(i) Non-recurring opex (0.3) (0.3)

  • (j)

Amortisation (52.5)

  • (52.5)

(k) Positive impairment of portfolio investments 11.6

  • 11.6

(l) D&A (4.1) (1.2) (2.9) (m) Operating Profit 43.9 (1.5) 45.4 (n) Finance income

  • (o)

Finance costs (23.7) (1.4) (22.3) (p) PBT 20.2 (2.9) 23.1 (q) Tax (3.9) 0.6 (4.5) (r) Net income 16.3 (2.3) 18.6 (s)

IFRS P&L

£m Reported Non- recurring * Underlying Guide Income on owned portfolios 64.4

  • 64.4

(a) + (k) Positive impairment of portfolio investments 12.2

  • 12.2

(l) Servicing revenue 21.6

  • 21.6

(b) Other income 2.1

  • 2.1

(c) + (h) Revenue 100.3

  • 100.3

Recurring opex (excl. D&A) (51.1)

  • (51.1)

(e) Share-based payment 0.2

  • 0.2

(g) Book value of REO assets sold (1.1)

  • (1.1)

(i) D&A (4.1) (1.2) (2.9) (m) Non-recurring opex (0.3) (0.3)

  • (j)

Operating Profit 43.9 (1.5) 45.4 (n) Finance income

  • (o)

Finance costs (23.7) (1.4) (22.3) (p) PBT 20.2 (2.9) 23.1 (q) Tax (3.9) 0.6 (4.5) (r) Net income 16.3 (2.3) 18.6 (s)

* Non-recurring items are those items or income or cost that that by virtue of either their size or nature, are not considered part of the underlying performance of the business. Refer appendix 2 for more details

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APPENDIX 2: OUTLINE OF 2019 DEBT STRUCTURE

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Proprietary and Confidential

Debt Structure as at Mar-19

Instrument Face Value Interest Rate Maturity Date Current Redemption Price Next Call Date Next Redemption Price Bonds 2021 Senior Secured Note £80.0m 6.50% 01-Apr-21 100.000%

  • 2021 € Senior Secured Floating Rate Note

£266.8m E+5.875% 15-Nov-21 101.000% 15-Nov-19 100.000% 2023 Senior Secured Note £512.9m 7.50% 05-Oct-23

  • 01-Oct-19

103.750% Bank Debt Revolving credit facility £245.3m L+3.00% 24-Sep-21 / 31-Mar-22

  • Loans

Asset backed lending facility £350.0m L+3.00% 03-Sep-23

  • 5.7%

Weighted average cost of debt

Debt Maturity Profile as at Mar-19 (£m)

80 267 513 350 347 245 863 2019 2020 2021 2022 2023 2021 SSN 2021 € SSFRN RCF 2023 SSN ABL

We continue to explore possible synergies with respect to Encore, including in connection with potential debt refinancing options.

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APPENDIX 3: CAPITAL DEPLOYED AT CONSISTENT RETURNS TO RECENT YEARS

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Lifetime vs. Pricing 120 month gross money multiple by vintage (31-Mar-19)

2.1x 2.4x 2.2x 2.2x 2.1x 1.7x 1.9x 2.0x 1.8x 1.9x 1.8x 0.6x 1.1x 0.9x 1.2x 0.7x 0.7x 0.5x 0.8x 0.3x 0.3x 0.3x

2.8x 3.4x 3.1x 3.4x 2.7x 2.4x 2.4x 2.8x 2.0x 2.2x 2.1x 2.0x

'05-'09 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 120 GMM @ Pricing Lifetime GMM @ 30-Mar-19

  • Avg. 120 GMM @ Pricing

(1) Reflects underlying portfolios from acquired businesses in the year in which they were originated by the acquired business (2) Lifetime GMM reflects actual collections to date plus estimated collections over next 180 months.

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APPENDIX 4: ERC REPLENISHMENT RATE CALCULATION

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Proprietary and Confidential (a) (b) (c) = (a) - (b) Year 1 Collections Year 11 Collections Net ERC decrease 31-Mar-18 480 98 382 31-Mar-19 425 89 336 Average net ERC decrease 359 (d) Avg 120 month MM 2.0x e ERC replenishment rate 180 (d) / e

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APPENDIX 5: GLOSSARY

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120-Month ERC 120-Month ERC means the Group’s estimated remaining collections on purchased loan portfolios over a 120-month period, which represents the expected future gross cash collections on the Group’s purchased loan portfolios over a 120-month period Adjusted EBITDA Adjusted EBITDA is Operating Profit adjusted to add back the effects of current value movements on owned loan portfolios, depreciation of property, plant and equipment, amortisation of intangibles, share based payments, net book value of assets sold and non-recurring operating expenses Adjusted EBITDA margin Adjusted EBITDA divided by gross revenue CAGR Compound annual growth rate Capital deployed ‘Portfolio acquisitions’ Collection activity costs Collection activity costs consists of staff salaries and benefit costs, servicing fees, communication costs (including the cost of collection letters sent to customers, such as printing and postage costs), credit bureau data costs and legal costs directly associated with collection activity. Cost to collect ratio Ratio of collection activity costs as a percentage of ‘Gross revenue’ DP collections Amounts collected, including by agents on behalf of the Group, from customers on purchased loan portfolios ERC ERC means the Group’s estimated remaining collections on purchased loan portfolios over a defined period, which represents the expected future gross cash collections on the Group’s purchased loan portfolios over a defined monthly or annualised period ERC replenishment rate Average of two ERC forecasts. ERC replenishment rate calculated as Year 1 collections less Year 11 collections, divided by average 120 month Money Multiple (2.0x) FCCR Fixed Charge Coverage Ratio ‘FCCR’ is calculated as LTM Adjusted EBITDA/ Net Interest Expense Gross revenue ‘DP collections’ plus ‘Servicing revenues’ plus ‘Other income’ adjusted to add back the effect of net book value of assets sold Leverage Leverage is Net debt / LTM Adjusted EBITDA LTM Last twelve months LTV Loan to Value ‘LTV’ ratio is calculated as Net Debt/ 84 ERC Money multiples Money multiples are total expected gross cash collections divided by portfolio acquisition price Non-recurring items Items or income or cost that that by virtue of either their size or nature, are not considered part of the underlying performance of the business. This includes restructuring costs, acquisition costs, IPO costs, costs associated with refinancing, foreign exchange gains or losses, the gain or loss on hedge instruments and amortisation of acquired intangibles Net revenue Revenue as reported in statutory accounts. Gross revenue less portfolio amortisation Portfolio acquisitions Portfolios purchased by the Group Servicing revenues Fees receivable and commissions from the servicing of loan portfolios on behalf of third parties, as recognised in the profit and loss account with respect to paying commissions accrued, inclusive of fees for other credit management services such as consultancy services, training, business process outsourcing and hosted IT systems provision