Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Objective
This discussion is from the perspective of management and is intended to help the reader understand our financial condition, cash flows and other changes in financial condition and results of operations. It should be read in conjunction with the financial statements and notes thereto included in Item 8 of this Form 10-K.
Executive Overview
We are a global financial and business services company with operations based primarily in the Americas and Europe, and to a lesser extent, Australia. Our primary business is the purchase, collection and management of portfolios of nonperforming loans.
For the year ended December 31, 2023 we had:
•Total portfolio purchases of $1.2 billion.
•Total cash collections of $1.7 billion.
•Cash efficiency ratio of 58.0%.
•Diluted earnings per share of $(2.13).
As of December 31, 2023, we had estimated remaining collections ("ERC") of $6.4 billion.
In the U.S., in 2023, portfolio supply and pricing dynamics improved, and we expect them to remain healthy in 2024. There is a positive correlation between industry credit card charge-off rates and our U.S. portfolio purchases, and in 2023, we benefited from significant growth in portfolio supply within the U.S. Additionally, we are evaluating and implementing a number of strategic and operational initiatives in our U.S. business designed to improve profitability by increasing cash collections while reducing our marginal costs. These initiatives include customer contact strategies and legal collection processes. In Brazil, we benefited from higher recent purchasing levels, which generated a significant increase in cash collections during 2023.
The European debt sale market remains competitive. While credit normalization in Europe has been slower than the U.S., like the U.S., Europe has seen improved portfolio pricing. While we believe the cost of living in certain European markets, including the UK, has put pressure on consumers, resulting in fewer large one-time payments, the proportion of customers paying us has remained stable.
In 2023, net loss attributable to PRA Group of $83.5 million reflected a decrease from net income attributable to PRA Group of $117.1 million in 2022. Total portfolio revenue in 2023 was $786.3 million compared to $941.2 million in 2022, a decrease of $154.9 million. Total operating expenses increased from $680.7 million in 2022 to $702.1 million in 2023. Interest expense, net increased from $130.7 million in 2022 to $181.7 million in 2023, an increase of $51.0 million. Due to our net loss in 2023, we recorded an income tax benefit of $16.1 million in 2023 compared to income tax expense of $36.8 million in 2022.
Frequently Used Terms
We may use the following terminology throughout this Form 10-K:
•"Buybacks" refers to purchase price refunded by the seller due to the return of ineligible nonperforming loan accounts.
•"Cash collections" refers to collections on our nonperforming loan portfolios.
•"Cash receipts" refers to cash collections on our nonperforming loan portfolios, fees and revenue recognized from our class action claims recovery services.
•"Change in expected recoveries" refers to the differences of actual recoveries received when compared to expected recoveries and the net present value of changes in estimated remaining collections.
•"Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon acquisition. These accounts are aggregated separately from insolvency accounts.
•"Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our nonperforming loan portfolios.
•"Finance receivables" or "receivables" refers to the negative allowance for expected recoveries recorded on our balance sheet as an asset.
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•"Insolvency" accounts or portfolios refer to accounts or portfolios of nonperforming loans that are in an insolvent status when we purchase them and as such are purchased as a pool of insolvent accounts. These accounts include IVAs, Trust Deeds in the UK, Consumer Proposals in Canada and bankruptcy accounts in the U.S., Canada, Germany and the UK.
•"Negative Allowance" refers to the present value of cash flows expected to be collected on our finance receivables.
•"Portfolio acquisitions" refers to all nonperforming loan portfolios acquired as a result of a purchase or added as a result of a business acquisition.
•"Portfolio purchases" refers to all nonperforming loan portfolios purchased in the normal course of business and excludes those added as a result of business acquisitions.
•"Portfolio income" reflects revenue recorded due to the passage of time using the effective interest rate calculated based on the purchase price of nonperforming loan portfolios and estimated remaining collections.
•"Purchase price" refers to the cash paid to a seller to acquire nonperforming loans.
•"Purchase price multiple" refers to the total estimated collections on our nonperforming loan portfolios divided by purchase price.
•"Recoveries" refers to cash collections plus buybacks and other adjustments.
•"Total estimated collections" or "TEC" refers to actual cash collections plus estimated remaining collections on our nonperforming loan portfolios.
Unless otherwise specified, references to 2023, 2022 and 2021 are for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, respectively.
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Results of Operations
The following table sets forth Consolidated Income Statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands). Certain prior year amounts have been reclassified for consistency with the current year presentation (fee income is now included within Other revenue on our Consolidated Income Statements).
Revenues:
Operating expenses:
Impairment of real estate 5,239 0.7 — — — —
Other income and (expense):
(1) Calculated by dividing cash receipts less operating expenses by cash receipts.
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Year Ended December 31, 2023 Compared With Year Ended December 31, 2022
Cash Collections
Cash collections for the years indicated were as follows (amounts in millions):(1) Cash collections adjusted refers to 2022 foreign currency cash collections remeasured at 2023 average U.S. dollar exchange rates.
Cash collections were $1.66 billion in 2023, a decrease of $68.6 million, or 4.0%, compared to $1.73 billion in 2022. The decrease was primarily due to a decline of $159.4 million, or 16.9%, in U.S. collections, largely due to the impact of lower purchasing levels in the years leading up to 2023 with higher levels of consumer liquidity driving a lower supply of nonperforming loan portfolios. This decrease was partially offset by higher cash collections in Brazil of $76.6 million, or 82.8%, due mainly to higher recent purchases, and an increase of $12.4 million, or 2.2%, in Europe Core collections.
Revenues
Revenues for the years indicated were as follows (amounts in thousands):
Total Portfolio Revenue
Total portfolio revenue was $786.3 million in 2023, a decrease of $154.9 million, or 16.5%, compared to $941.2 million in 2022. This was primarily due to the decrease in changes in expected recoveries, which was largely driven by lower levels of cash overperformance and a net increase to the ERC of certain pools during 2022 compared to a net decrease during 2023. Additionally, and primarily impacting the first quarter of 2023, the tax refund season was softer than we had anticipated, with U.S. collections lower than our expectations, which then prompted a reduction in ERC. This resulted in a negative $30.7 million net present value adjustment to our U.S. Core portfolio, with nearly half of this adjustment related to the 2021 U.S. Core vintage. The decrease in portfolio income was largely the result of higher levels of consumer liquidity driving a lower supply of nonperforming loan portfolios in the years leading up to 2023.
Other Revenue
Other revenue was $16.3 million in 2023, a decrease of $9.0 million, or 35.6%, compared to $25.3 million in 2022. The decrease was primarily due to the timing of settlements in CCB.
Operating Expenses
Total operating expenses were $702.1 million in 2023, an increase of $21.4 million, or 3.1%, compared to $680.7 million in 2022.
Compensation and Employee Services
Compensation and employee service expenses were $288.8 million in 2023, an increase of $3.3 million, or 1.2%, compared to $285.5 million in 2022. The increase mainly reflects higher severance expenses of $8.6 million, partially offset by decreases in temporary labor and healthcare and other benefit expenses.
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Legal Collection Fees
Legal collection fees of $38.1 million in 2023 were stable, decreasing slightly compared to $38.5 million in 2022. Legal collection fees represent contingent fees incurred for the cash collections generated by our third-party attorney network.
Legal Collection Costs
Legal collection costs were $89.1 million in 2023, an increase of $12.3 million, or 16.0%, compared to $76.8 million in 2022. Legal collection costs primarily consist of costs paid to courts where a lawsuit is filed for the purpose of attempting to collect on an account. The increase primarily reflects higher volumes of lawsuits filed in the U.S. during 2023.
Agency Fees
Agency fees were $74.7 million in 2023, an increase of $10.9 million, or 17.1%, compared to $63.8 million in 2022. Agency fees primarily represent third-party collection fees. The increase was mainly due to the increase in cash collections in Brazil.
Outside Fees and Services
Outside fees and services expenses were $82.6 million in 2023, a decrease of $9.8 million, or 10.6%, compared to $92.4 million in 2022. The decrease reflects lower litigation costs and consulting fees.
Communication
Communication expenses were $40.4 million in 2023, an increase of $1.2 million, or 3.1%, compared to $39.2 million in 2022. Communication expenses primarily relate to correspondence, network and telephony costs associated with our revenue generating activities. The small increase was mainly due to higher business volumes related to customer contact strategies.
Impairment of Real Estate
Impairment of real estate was $5.2 million in 2023 due to an impairment charge associated with our decision to cease call center operations at one of our owned regional offices in the U.S., which is being marketed for sale or lease. No impairment was recorded in 2022.
Interest Expense, Net
Interest expense, net was $181.7 million in 2023, an increase of $51.0 million, or 39.1%, compared to $130.7 million in 2022, primarily reflecting increased interest rates and higher average debt balances. Interest income increased $10.7 million primarily due to the cash we received and invested from the issuance of our 2028 Notes in the first quarter of 2023, substantially all of the net proceeds of which we used to retire our Convertible Senior Notes due 2023 ("2023 Notes") in the second quarter of 2023, in addition to higher interest rates earned on our investments and bank account balances.
Interest expense, net for the years indicated was as follows (amounts in thousands):
Amortization of loan fees and other loan costs 9,223 10,097 (874) (8.7)
Income Tax Expense/(Benefit)
Income tax benefit was $16.1 million in 2023 compared to income tax expense of $36.8 million in 2022. The change in income tax expense/(benefit) was primarily due to the loss before income taxes in 2023 compared to income before income taxes in 2022. In 2023, our effective tax benefit rate was 19.5%, compared to an effective tax rate of 23.8% in 2022. This was mainly due to changes in the mix of income from different taxing jurisdictions.
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Noncontrolling interests
In Brazil, we purchase nonperforming loan portfolios through investment funds in which we hold a majority interest. The portion of our Net income/(loss) attributable to noncontrolling interests is reflected in Adjustment of net income attributable to noncontrolling interests, which was $16.7 million in 2023 compared to $0.9 million in 2022. The increase was due to the strong performance of our investment funds, where we benefited from a significant increase in cash collections during 2023 due to higher recent purchasing levels.
Year Ended December 31, 2022 Compared To Year Ended December 31, 2021
Refer to Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our 2022 Form 10-K for a discussion of our 2022 results compared to our 2021 results.
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Supplemental Performance Data
Finance Receivables Portfolio Performance
We purchase portfolios of nonperforming loans from a variety of credit originators or acquire portfolios through strategic acquisitions and segregate them into two main portfolio segments: Core or Insolvency, based on the status of the account upon acquisition. In addition, the accounts are segregated into geographical regions based upon where the account was acquired. Ultimately, accounts are aggregated into annual pools based on portfolio segment, geography and year of acquisition.Portfolios of accounts that were in an insolvency status at the time of acquisition are represented in the Insolvency tables below.All other acquisitions of portfolios of accounts are included in our Core portfolio tables as represented below.Once an account is initially segregated, it is not later transferred from an Insolvency pool to a Core pool or vice versa and the account continues to be accounted for as originally segregated regardless of any future changes in operational status.Specifically, if a Core account files for bankruptcy or insolvency protection after acquisition, we adjust our collection practices to comply with any respective bankruptcy or insolvency rules or policies; however, for accounting purposes, the account remains in the Core pool.In the event an insolvency account is dismissed from its bankruptcy or insolvency status whether voluntarily or involuntarily, we are typically free to pursue alternative collection activities; however, the account remains in the Insolvency pool.
The purchase price multiple represents our estimate of total cash collections over the original purchase price of the portfolio. Purchase price multiples can vary over time due to a variety of factors, including pricing competition, supply levels, paper type, age of the accounts acquired, mix of portfolios purchased, costs to collect, expected returns and changes in operational efficiency. For example, increased pricing due to elevated levels of competition or supply constraints negatively impacts purchase price multiples as we pay more to buy similar portfolios of nonperforming loans.
Further, there is a direct relationship between the price we pay for a portfolio, the purchase price multiple and the effective interest rate of the pool.When we pay more for a portfolio, the purchase price multiple and effective interest rates are generally lower. The opposite tends to occur when we pay less for a portfolio. Certain types of accounts have lower collection costs, and we generally pay more for these types of accounts, resulting in a lower purchase price multiple but similar net income margins when compared with other portfolio purchases.Within a given portfolio type, when lower purchase price multiples are the result of more competitive pricing, this generally leads to lower profitability. As portfolio pricing becomes more favorable, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the accounts, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection costs, while older accounts and lower balance accounts typically carry higher costs and, as a result, require higher purchase price multiples to achieve the same net profitability as fresher paper.
Revenue recognition is driven by estimates of the amount and timing of future cash collections. We record new portfolio acquisitions at the purchase price, which reflects the amount we expect to collect discounted at an effective interest rate. During the year of acquisition, portfolios are aggregated into annual pools, and the blended effective interest rate will change to reflect new buying and new cash flow estimates until the end of the year. At that time, the purchase price amount is fixed at the aggregated amounts paid to acquire the portfolio, the effective interest rate is fixed at the amount we expect to collect, discounted at the rate to equate purchase price to the recovery estimate, and the currency rates are fixed for purposes of comparability in future periods.Depending on the level of performance and expected future impacts from our operations, we may update ERC and TEC levels based on the results of our cash forecasting with a correlating adjustment to the purchase price multiple.We follow an established process to evaluate ERC, and we typically do not adjust our ERC and TEC until we gain sufficient collection experience and confidence with a pool of accounts.Over time, our TEC has often increased as pools have aged resulting in the ratio of TEC to purchase price for any given year of buying to gradually increase.
The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all of the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of categories of portfolio segments and related geographies.
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Purchase Price Multiplesas of December 31, 2023Amounts in thousands
Americas and Australia Core
Americas Insolvency
Europe Core
Europe Insolvency
(1)Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014.
(2)Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions.
(3)Non-U.S. amounts are presented at the exchange rate at the end of the year in which the portfolio was purchased. In addition, any purchase price adjustments that occur throughout the life of the portfolio are presented at the year-end exchange rate for the respective year of purchase.
(4)Non-U.S. amounts are presented at the year-end exchange rate for the respective year of purchase.
(5)Non-U.S. amounts are presented at the December 31, 2023 exchange rate.
(6)The Original Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition.
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Americas and Australia Core
Americas Insolvency
Europe Core
Europe Insolvency
(1)Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014.
(2)Non-U.S. amounts are presented using the average exchange rates during the current reporting period.
(3)Non-U.S. amounts are presented at the December 31, 2023 exchange rate.
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Cash Collections
Americas and Australia Core
Americas Insolvency
Europe Core
Europe Insolvency
(1)Non-U.S. amounts are presented using the average exchange rates during the cash collection period.
(2)Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014.
(3)Includes the nonperforming loan portfolios that were acquired through our business acquisitions.
(4)Non-U.S. amounts are presented at the exchange rate at the end of the year in which the portfolios were purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the year-end exchange rate for the respective year of purchase.
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Estimated Remaining Collections
The following chart shows our ERC of $6.4 billion as of December 31, 2023 by geographical region (amounts in millions):
The following chart shows our ERC by year and geography as of December 31, 2023. These amounts reflect current estimates of how much we expect to collect on our portfolios and, where applicable, are converted to U.S. dollars at the December 31, 2023 exchange rate.
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The following table displays our ERC by year and geography as of December 31, 2023 (amounts in thousands):
ERC By Year & Geography
Cash Collections
The following table displays our cash collections by geography and portfolio type for the years indicated (amounts in thousands):
Cash Collections by Geography and Portfolio Type
The following table displays the composition of our Core cash collections for the years indicated (amounts in thousands):
Cash Collections by Source - Core Portfolios Only
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Portfolio Acquisitions
The following chart shows the purchase price of our nonperforming loan portfolios by year since 2013, including portfolios acquired through our business acquisitions:
* 2014 includes portfolios acquired in connection with the acquisition of Aktiv Kapital AS in 2014.
The following table displays our portfolio acquisitions for the years indicated (amounts in thousands):
Portfolio Acquisitions by Geography & Type
Portfolio Acquisitions (U.S. Only)
The following tables categorize our U.S. portfolio acquisitions for the years indicated by major asset type and delinquency category. Since our inception in 1996, we have acquired more than62.5 million customer accounts in our U.S. portfolio (amounts in thousands).
U.S. Portfolio Acquisitions by Major Asset Type
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U.S. Portfolio Acquisitions by Delinquency Category
(1) Fresh accounts are typically past due 120 to 270 days, charged-off by the credit originator and sold prior to any post-charge-off collection activity.
(2) Primary accounts are typically 240 to 450 days past due, charged-off and have been previously placed with one contingent fee servicer.
(3) Secondary accounts are typically 360 to 630 days past due, charged-off and have been previously placed with two contingent fee servicers.
(4) Other accounts are 480 days or more past due, charged-off and have previously been worked by three or more contingent fee servicers.
Non-GAAP Financial Measures
We report our financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). However, our management uses certain non-GAAP financial measures, including adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), to evaluate our operating and financial performance as well as to set performance goals. We present Adjusted EBITDA because we consider it an important supplemental measure of operations and financial performance. Our management believes Adjusted EBITDA helps provide enhanced period to period comparability of operations and financial performance, as it excludes certain items whose fluctuations from period to period do not necessarily correspond to changes in the operations of our business, and is useful to investors as other companies in the industry report similar financial measures. Adjusted EBITDA should not be considered as an alternative to net income determined in accordance with GAAP. In addition, our calculation of Adjusted EBITDA may not be comparable to the calculation of similarly titled measures presented by other companies.
Adjusted EBITDA is calculated starting with our GAAP financial measure, Net income/(loss) attributable to PRA Group, Inc. and is adjusted for:
•income tax expense (or less income tax benefit);
•foreign exchange loss (or less foreign exchange gain);
•interest expense, net (or less interest income, net);
•other expense (or less other income);
•depreciation and amortization;
•impairment of real estate;
•net income attributable to noncontrolling interests; and
•recoveries applied to negative allowance less changes in expected recoveries.
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The following table provides a reconciliation of Net income/(loss) attributable to PRA Group, Inc., as reported in accordance with GAAP, to Adjusted EBITDA for the years indicated (amounts in thousands):
Reconciliation of Non-GAAP Financial Measures
Adjustments:
Foreign exchange (gains)/losses (289) (985) 809
Impairment of real estate 5,239 — —
(1) Other expense/(income) reflects non-operating related activity.
Additionally, we evaluate our business using certain ratios that use Adjusted EBITDA, including Debt to Adjusted EBITDA, which is calculated by dividing Borrowings by Adjusted EBITDA.The following table displays our Debt to Adjusted EBITDA ratio as of December 31, 2023 and 2022 (dollars in thousands):
Debt to Adjusted EBITDA
Debt to Adjusted EBITDA 2.89 x 2.25 x
Liquidity and Capital Resources
We actively manage our liquidity to meet our business needs and financial obligations.
Sources of Liquidity
Cash and cash equivalents. As of December 31, 2023, cash and cash equivalents totaled $112.5 million, of which $76.5 million related to our international operations with indefinitely reinvested earnings. Refer to Note 13 to our Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding the unremitted earnings of our international subsidiaries.
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Borrowings. As of December 31, 2023, we had the following committed amounts, amounts outstanding and availability under our credit facilities (amounts in thousands):
Availability as of December 31, 2023
Less: Debt discounts and issuance costs — (11,945) — — —
(1) Includes the North American and Colombian revolving credit facilities.
(2) Available borrowings after calculation of current borrowing base, which may be used for general corporate purposes, including portfolio purchases.
(3) Subject to debt covenants, including advance rates ranging from 35-55% of applicable ERC.
On June 1, 2023, we used substantially all of the net proceeds received from the 2028 Notes to retire the 2023 Notes. We used the remainder of the net proceeds to repay a portion of the outstanding borrowings under the domestic revolving credit facility under our North America Credit Agreement.
Interest-bearing deposits. Under our European credit facility, our interest-bearing deposit funding is limited to SEK 1.2 billion (the equivalent of approximately $118.9 million as of December 31, 2023), and as of December 31, 2023, our interest-bearing deposits were $115.6 million.
Furthermore, we have the ability to slow the purchase of nonperforming loans if necessary, and use the net cash flow generated from cash collections from our portfolio of existing nonperforming loans to temporarily service our debt and fund existing operations. We invested $1.2 billion in portfolio acquisitions in 2023, which generated $171.9 million of cash collections, representing 10.4% of our total 2023 cash collections.
Uses of Liquidity and Material Cash Requirements
Forward Flows. We enter into forward flow agreements for the purchase of nonperforming loans. These agreements typically have terms ranging from three to 12 months and establish purchase prices and specific criteria for the accounts to be purchased. Some of the agreements establish a volume reference for the contract term in the form of a target or maximum, however, very few agreements establish a minimum contractual obligation, and many of the contracts contain early termination provisions allowing either party to cancel the agreements in accordance with a specified notice period.
As of December 31, 2023, we have forward flow agreements in place with an estimated purchase price of approximately $550.0 million over the next 12 months. This total is comprised of $400.0 million for the Americas and Australia and $150.0 million for Europe. These amounts represent our estimated forward flow purchases over the next 12 months based on projections and other factors, including sellers' estimates of future flows sales, and are dependent on actual delivery by the sellers. Accordingly, amounts purchased under these agreements may vary significantly. We may also enter into new or renewed forward flow commitments and/or close on spot purchase transactions in addition to the current forward flow agreements.
Borrowings. Of our $2.9 billion in borrowings as of December 31, 2023, estimated interest, unused fees and principal payments for the next 12 months are $202.4 million, of which $12.5 million relates to principal on the term loan under our North American Credit Agreement. Beyond 12 months, as of December 31, 2023, principal payments on our debt are due from between one and six years. Many of our financing arrangements include covenants with which we must comply, and as of December 31, 2023, we determined that we were in compliance with these covenants. For more information, see Note 7 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.
Share Repurchases. On February 25, 2022, we completed our $230.0 million share repurchase program. Also on February 25, 2022, our Board of Directors approved a new share repurchase program under which we are authorized to repurchase up to $150.0 million of our outstanding common stock. Repurchases are subject to restrictive covenants contained in
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our credit facilities and indentures that govern our Senior Notes. Considering these covenants, during 2022, we repurchased approximately 2.3 million shares of our common stock for $99.4 million, and there were no repurchases during 2023.
The share repurchase program has no stated expiration date and does not obligate us to repurchase any specified amount of shares, remains subject to the discretion of our Board of Directors and, subject to compliance with applicable laws, may be modified, suspended or discontinued at any time. Repurchases may be made from time-to-time in open market transactions, through privately negotiated transactions, in block transactions, through purchases made in accordance with trading plans adopted under Rule 10b5-1 of the Exchange Act, or other methods, subject to market and/or other conditions and applicable regulatory requirements. As of December 31, 2023, we had $67.7 million remaining for share repurchases under the program.
Leases. Our leases have remaining lease terms from one to 12 years. As of December 31, 2023, we had $50.3 million in lease liabilities, of which $10.0 million is due within the next 12 months. For more information, see Note 5 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.
Derivatives. We enter into derivative financial instruments to reduce our exposure to fluctuations in interest rates on variable rate debt and foreign currency exchange rates. As of December 31, 2023, we had $20.4 million of derivative liabilities, $8.8 million of which mature within the next 12 months. The remaining $11.6 million matures in 2028. For more information, see Note 8 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.
Investments. As of December 31, 2023, we held $59.5 million in Swedish treasury securities to meet the liquidity requirements of the Swedish Financial Services Authority for our banking subsidiary, AK Nordic AB.
We believe that funds generated from operations and cash collections on nonperforming loan portfolios, together with existing cash, available borrowings under our revolving credit facilities and access to the capital markets, will be sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, debt maturities and additional portfolio purchases during the next 12 months and beyond. Market conditions permitting, we may seek to access the debt or equity capital markets as we deem appropriate. Business acquisitions or higher than expected levels of portfolio purchasing could require additional financing from other sources. We may also, from time to time, repurchase Senior Notes in the open market or otherwise.
Cash Flow Analysis
The following table summarizes our cash flow activity for the years ended December 31, 2023 and 2022 (amounts in thousands):
Net cash provided by/(used in):
Operating Activities
Net cash provided by/(used in) operating activities mainly reflects cash collections recognized as revenue and cash paid for operating expenses, interest and income taxes. To calculate net cash provided by/(used in) operating activities, net income/(loss) was adjusted for (i) non-cash items included in net income such as unrealized foreign currency transaction (gains)/losses, changes in expected recoveries, depreciation and amortization, deferred taxes, fair value changes in equity securities, and stock-based compensation, as well as (ii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of payments.
Net cash used in operating activities was $97.5 million in 2023 compared to net cash provided by operating activities of $21.6 million in 2022. The change was primarily driven by lower cash collections recognized as income, higher cash paid for interest and the impact of unrealized foreign currency transaction (gains)/losses.
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Investing Activities
Net cash used in investing activities increased by $355.3 million in 2023, primarily driven by an increase of $316.0 million in purchases of nonperforming loan portfolios and a decrease of $57.8 million in recoveries applied to the negative allowance. This activity was partially offset by a decrease of $10.4 million in purchases of property and equipment.
Financing Activities
Net cash provided by financing activities increased by $476.6 million in 2023, primarily driven by proceeds from the issuance of our 2028 Notes in aggregate principal amount of $400.0 million, a $326.0 million increase from net payments on our lines of credit in 2022 to net draws on our lines of credit in 2023 and a decrease in repurchases of our common stock of $111.4 million. These items were partially offset by the retirement of $345.0 million in aggregate principal amount of our 2023 Notes.
Effect of Exchange Rates on Cash
The net effect of exchange rates on cash increased $31.0 million in 2023, primarily due to foreign currency remeasurement differences on our intercompany loans.
Recent Accounting Pronouncements
For a summary of recent accounting pronouncements and the anticipated effects on our Consolidated Financial Statements, see Note 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.
Critical Accounting Estimates
Our Consolidated Financial Statements have been prepared in accordance with GAAP. Some of our significant accounting policies require that we use estimates, assumptions and judgments that affect the reported amounts of revenues, expenses, assets and liabilities. For a discussion of our significant accounting policies, refer to Note 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.
We consider accounting estimates to be critical if they (1) involve a significant level of estimation uncertainty and (2) have had or are reasonably likely to have a material impact on our financial condition or results of operations.We base our estimates on historical experience, current trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our Consolidated Financial Statements may be material. We have determined that the following accounting policies involve critical estimates:
Revenue Recognition - Finance Receivables
Revenue recognition for finance receivables involves the use of estimates and the exercise of judgment on the part of management. These estimates include projections of the amount and timing of cash collections we expect to receive from our pools of accounts. We review individual pools for trends, actual performance versus projections and curve shape (a graphical depiction of the amount and timing of cash collections). We then project ERC and apply a discounted cash flow methodology to our ERC. Adjustments to ERC may include adjustments reflecting recent collection trends, our view of current and future economic conditions, changes in collection assumptions or other timing related adjustments.
Significant changes in our cash flow estimates could result in increased or decreased revenue as we immediately recognize the discounted value of such changes using the constant effective interest rate of the pool. Generally, adjustments to cash forecasts result in an adjustment to revenue at an amount less than the impact of the performance in the period due to the effects of discounting. Additionally, cash collection forecast increases will result in more revenue being recognized and cash collection forecast decreases in less revenue being recognized over the life of the pool.
Goodwill
In accordance with Financial Accounting Standards Board ("FASB") ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), we evaluate goodwill for impairment annually as of October 1, and more frequently if circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value.
We determine the fair value of a reporting unit by applying certain approaches prescribed under ASC Topic 820 "Fair Value Measurements and Disclosures": the income approach and the market approach. Under the income approach, we estimate
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the fair value of a reporting unit based on the present value of estimated future cash flows and a residual terminal value. Cash flow projections are based on management's estimates of a variety of factors, including growth rates and operating margins, which take into consideration industry and market conditions. Under the market approach, we estimate fair value based on market trading multiples and other relevant market transactions involving comparable publicly traded companies with operating and investment characteristics similar to the reporting unit. Depending on the availability of public data and suitable comparable transaction data, we may give more weight to the income approach than the market approach. We also assess the reasonableness of the aggregate estimated fair value of our reporting units by comparison to our market capitalization over a reasonable period, considering historic control premiums in the financial services industry and the current market environment.
Based on the annual October 1 impairment test, we concluded that the goodwill of our reporting units was not impaired. However, we estimated that our Debt Buying and Collection ("DBC") reporting unit’s fair value exceeded its carrying value by 6%, and therefore, the reporting unit may be at-risk for future impairment if our cash flow projections are not met or if market factors utilized in the impairment test deteriorate, including adverse changes in the debt sales market that impact our estimated purchasing volumes and purchase price multiples, and/or an increase in the discount rate. We estimated the fair value of the DBC reporting unit based on the income approach, and as an assessment for reasonableness, also applied the market approach. As of December 31, 2023, the DBC reporting unit’s carrying amount included goodwill of $404.7 million.
Key inputs to the DBC reporting unit’s fair value under the income approach included our forecasted financial results and the discount rate. Forecasted financial results were developed considering several inputs and assumptions, including portfolio purchasing volume, purchase price multiples, operating expenses and the projected impact of certain strategic and operational initiatives. Based on purchasing volume estimates, the forecasted financial results reflect an expected long-term growth rate of 3.3%. Purchase price multiples related to our existing portfolios were based on historical growth rates, while purchase price multiples on future portfolio purchases were based on recent and expected future purchasing metrics. We are implementing a number of strategic and operational initiatives in our U.S. business designed to increase cash collections while reducing our marginal costs. The estimated net cash flows from certain of these initiatives were incorporated in our goodwill evaluation, reflecting an assessment of our ability to execute such initiatives.
The discount rate used was based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics, including assumptions related to the reporting unit's ability to execute on the projected cash flows. The discount rate utilized for the DBC reporting unit was 10.0% as of October 1, 2023. The market interest rate inherent in the discount rate calculation decreased after October 1, 2023, and as a result, the fair value of the DBC reporting unit has since become less sensitive to this input.
Our goodwill evaluation is dependent on a number of factors, both internal and external. The assumptions used in estimating the DBC reporting unit’s fair value were based on currently available data and involved the exercise of judgment. There are inherent uncertainties related to the assumptions used in our evaluation and to our application of those assumptions. If market factors deteriorate, or if estimates used in our quantitative assessment prove to be inaccurate, we may have to record impairment charges in future periods.
Income Taxes
We are subject to income taxes in the U.S. and in numerous international jurisdictions. These tax laws are complex and are subject to different interpretations by the taxpayer and the relevant government taxing authorities. When determining our domestic and non-U.S. income tax expense, we make judgments about the application of these inherently complex laws.
We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is estimated using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
We exercise significant judgment in estimating the potential exposure to unresolved tax matters and apply a more likely than not criteria approach for recording tax benefits related to uncertain tax positions in the application of the complex tax laws. While actual results could vary, we believe we have adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters. We record interest and penalties related to unresolved tax matters as a component of income tax expense when the more likely than not standards are not met.
If all or part of the deferred tax assets are determined not to be realizable in the future, we would establish a valuation allowance and charge the impact to earnings in the period such a determination is made. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a
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positive adjustment to earnings. The establishment or release of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the use of loss carryforwards or other deferred tax assets in future periods. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position. For further information regarding our uncertain tax positions, refer to Note 13 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our business is subject to various financial risks, including market, currency, interest rate, credit, liquidity and cash flow risk. We use various strategies, including derivative financial instruments, to manage these risks; however, they may still impact our Consolidated Financial Statements.
We do not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed, nor do we enter into or hold derivatives for trading or speculative purposes. Derivative instruments involve, to varying degrees, elements of non-performance, or credit risk. We do not believe that we currently face a significant risk of loss in the event of non-performance by the counterparties to these instruments, as these transactions were executed with a diversified group of major financial institutions with investment-grade credit ratings. Our intention is to spread our counterparty credit risk across a number of counterparties so that exposure to a single counterparty is mitigated.
Interest Rate Risk
We are subject to interest rate risk from borrowings on our variable rate credit facilities, as well as our interest-bearing deposits. As such, our consolidated financial results are subject to fluctuations due to changes in market interest rates. We assess this interest rate risk by estimating the increase or decrease in interest expense that would occur due to a change in short-term interest rates. The borrowings on our variable rate credit facilities were $1.9 billion as of December 31, 2023. Based on our debt structure as of December 31, 2023, assuming a 50 basis point decrease in interest rates, interest expense over the following 12 months would decrease by an estimated $5.7 million. Assuming a 50 basis point increase in interest rates, interest expense over the following 12 months would increase by an estimated $5.7 million.
To reduce the exposure to changes in the market rate of interest, we have entered into interest rate derivative contracts for a portion of our borrowings under our floating rate financing arrangements. The terms of the interest rate derivative contracts require us to receive a variable interest rate and pay a fixed interest rate. Of our $2.9 billion in total borrowings as of December 31, 2023, $1.0 billion was fixed rate debt. Considering these fixed rate borrowings and interest rate hedges on our variable rate debt, with maturities that range from one month to five years, as of December 31, 2023, 63% of our total debt was either fixed rate or converted to a fixed rate.
Currency Exchange Risk
We operate internationally and enter into transactions denominated in various foreign currencies. In 2023, we generated $444.3 million of revenues from operations outside the U.S. and used multiple functional currencies. Weakness in one particular currency might be offset by strength in other currencies over time.
Fluctuations in foreign currencies could cause us to incur foreign currency exchange gains and losses, and could adversely affect our comprehensive income and stockholders' equity. Additionally, our reported financial results could change from period to period due solely to fluctuations between currencies. Foreign currency gains and losses are primarily the result of the re-measurement of transactions in other currencies into an entity's functional currency. Foreign currency gains and losses are included as a component of Other income and (expense) in our Consolidated Income Statements. From time to time, we may elect to enter into foreign exchange derivative contracts to reduce these variations in our Consolidated Income Statements.
When an entity's functional currency is different than the reporting currency of its parent, foreign currency translation adjustments may occur. Foreign currency translation adjustments are included as a component of Other comprehensive income/(loss) in our Consolidated Statements of Comprehensive Income and as a component of Equity in our Consolidated Balance Sheets.
We have taken measures to mitigate the impact of foreign currency fluctuations. We have organized our European operations so that portfolio ownership and collections generally occur within the same entity. Additionally, our European and UK credit facilities are multi-currency facilities, allowing us to better match funding and portfolio acquisitions by currency. We actively monitor the value of our finance receivables by currency. In the event adjustments are required to our liability composition by currency we may, from time to time, execute re-balancing foreign exchange contracts to more closely align funding and portfolio acquisitions by currency.
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Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Reports of Independent Registered Public Accounting Firms 43
Consolidated Balance Sheets 47
Consolidated Income Statements 48
Consolidated Statements of Comprehensive Income 49
Consolidated Statements of Changes in Equity 50
Consolidated Statements of Cash Flows 51
Notes to Consolidated Financial Statements 52
1 – General and Summary of Significant Accounting Policies 52
2– Finance Receivables, net 58
3 – Investments 60
6 – Property and Equipment, net 62
7 – Borrowings 63
8 – Derivatives 67
9 – Fair Value 68
10 – Accumulated Other Comprehensive Loss 70
11 – Share-Based Compensation 71
12 – Earnings per Share 73
14 – Commitments and Contingencies 75
15 – Retirement Plans 76
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of PRA Group, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PRA Group, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the two years ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
43
Estimate of expected future recoveries on purchased credit deteriorated assets
Goodwill Impairment Assessment
44
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Richmond, Virginia
February 28, 2024
45
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
PRA Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, changes in equity, and cash flows of PRA Group, Inc. and subsidiaries (the Company) for the year ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2007 to 2022.
Virginia Beach, Virginia
February 28, 2022
46
PRA Group, Inc.
Consolidated Balance Sheets
December 31, 2023 and 2022
(Amounts in thousands)
Assets
Liabilities and Equity
Liabilities:
Equity:
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
PRA Group, Inc.
Consolidated Income Statements
For the years ended December 31, 2023, 2022 and 2021
(Amounts in thousands, except per share amounts)
Revenues:
Operating expenses:
Impairment of real estate 5,239 — —
Other income and (expense):
Foreign exchange gain/(loss), net 289 985 (809)
Net income/(loss) per common share attributable to PRA Group, Inc.:
Weighted average number of shares outstanding:
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
PRA Group, Inc.
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2023, 2022 and 2021
(Amounts in thousands)
Other comprehensive income/(loss), net of tax
Debt securities available-for-sale 302 (16) (348)
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
PRA Group, Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2023, 2022 and 2021
(Amounts in thousands)
Shares Amount
Components of comprehensive income, net of tax:
Debt securities available-for-sale — — — — (348) — (348)
Distributions to noncontrolling interests — — — — — (21,411) (21,411)
Contributions from noncontrolling interests — — — — — 23,413 23,413
Vesting of restricted stock 264 2 (2) — — — —
Share-based compensation expense — — 15,940 — — — 15,940
Employee stock relinquished for payment of taxes — — (5,992) — — — (5,992)
Components of comprehensive income, net of tax:
Debt securities available-for-sale — — — — (16) — (16)
Distributions to noncontrolling interests — — — — — (6,691) (6,691)
Contributions from noncontrolling interests — — — — — 17,554 17,554
Vesting of restricted stock 303 4 (4) — — — —
Share-based compensation expense — — 13,047 — — — 13,047
Employee stock relinquished for payment of taxes — — (8,472) — — — (8,472)
Components of comprehensive income, net of tax:
Debt securities available-for-sale — — — — 302 — 302
Distributions to noncontrolling interests — — — — — (10,140) (10,140)
Vesting of restricted stock 267 2 (2) — — — —
Share-based compensation expense — — 11,095 — — — 11,095
Employee stock relinquished for payment of taxes — — (6,194) — — — (6,194)
(1) Beginning January 1, 2021, the Company implemented ASU 2020-06 Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. For additional information, see Note 1 "General and Summary of Significant Accounting Policies" to the Company's Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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PRA Group, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2023, 2022 and 2021
(Amounts in thousands)
Cash flows from operating activities:
Gain on extinguishment of senior notes (343) — —
Amortization of debt discount and issuance costs 9,223 10,097 9,508
Fair value in earnings for equity securities 1,564 437 (386)
Changes in operating assets and liabilities:
Right-of-use asset/lease liability (499) 464 82
Cash flows from investing activities:
Business acquisition, net of cash acquired — — (647)
Cash flows from financing activities:
Retirement of Convertible Senior Notes due 2023 (345,000) — —
Proceeds from issuance of Senior Notes due 2029 — — 350,000
Proceeds from issuance of Senior Notes due 2028 400,000 — —
Repurchases of senior notes (3,657) — —
Tax withholdings related to share-based payments (6,194) (8,472) (5,992)
Contributions from noncontrolling interests — 17,554 23,413
Net decrease in interest-bearing deposits (1,416) 4,688 4,716
Net increase/(decrease) in cash and cash equivalents 28,934 (4,314) (31,975)
Supplemental disclosure of cash flow information:
Cash, cash equivalents and restricted cash reconciliation:
The accompanying notes are an integral part of these Consolidated Financial Statements.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
1. General and Summary of Significant Accounting Policies:
Nature of operations: As used herein, the terms "PRA Group," the "Company," or similar terms refer to PRA Group, Inc. and its subsidiaries.
PRA Group, Inc., a Delaware corporation, is a global financial and business services company with operations based primarily in the Americas and Europe, and to a lesser extent, Australia. The Company's primary business is the purchase, collection and management of portfolios of nonperforming loans. The Company also provides fee-based services on class action claims recoveries in the United States ("U.S.").
Basis of presentation: The Consolidated Financial Statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Realized results could differ from those estimates and assumptions.
Reclassification of prior year presentation: Certain prior year amounts have been reclassified for consistency with the current year presentation. Fee income is now included within Other revenue in the Consolidated Income Statements.
Consolidation: The Consolidated Financial Statements include the accounts of PRA Group and other entities in which the Company has a controlling interest. All significant intercompany accounts and transactions have been eliminated.
Entities in which the Company has a controlling financial interest, through ownership of the majority of the entities’ voting equity interests, or through other contractual rights that give the Company control, consist of entities that purchase and collect on portfolios of nonperforming loans.
Noncontrolling interests represent the portion of net income and equity attributable to third-party owners of consolidated subsidiaries that are not wholly-owned by the Company. These noncontrolling interests relate primarily to funds in Brazil that invest in nonperforming loan portfolios.
Investments in companies in which the Company has significant influence over operating and financing decisions, but does not own a majority of the voting equity interests, are accounted for in accordance with the equity method of accounting, which requires the Company to recognize its proportionate share of the entity’s net earnings. The Company's equity method investment is included in Other assets, with income or loss included in Other revenue.
The Company performs on-going reassessments whether changes in the facts and circumstances regarding the Company’s involvement with an entity could cause the Company’s consolidation conclusion to change.
Foreign currency: Assets and liabilities have been translated into the reporting currency using the exchange rates in effect on the date of the Consolidated Balance Sheets. 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. Revenue and expense accounts are translated using the weighted average exchange rate during the period. The cumulative translation adjustments associated with the net assets of international subsidiaries are recorded in Accumulated other comprehensive loss in the accompanying Consolidated Statements of Changes in Equity.
Segments: The Company has determined that it has two operating segments that meet the aggregation criteria of Accounting Standards Codification ("ASC") 280, Segment Reporting ("ASC 280"), and, therefore, it has one reportable segment. This conclusion is based on similarities among the operating segments, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or classes of customers for their services, the methods used to distribute their services and the nature of the regulatory environment.
52
PRA Group, Inc.
Notes to Consolidated Financial Statements
Revenues and long-lived assets by geographical location: Revenues for the years ended December 31, 2023, 2022 and 2021, and long-lived assets held as of December 31, 2023 and 2022, by geographic area in which the Company operates, were as follows (amounts in thousands):
Revenues (2) Long-Lived Assets
(1) None of the countries included in Other comprise greater than 10% of the Company's consolidated revenues or long-lived assets.
(2) Based on the Company’s financial statement information used to produce the Company's general-purpose financial statements, it is impracticable to report further breakdowns of revenues from external customers.
The Company generates revenues from collection activities on nonperforming loans, and to a lesser extent, fee-based services and equity method investments. Long-lived assets consist of Property and equipment, net and Right-of-use ("ROU") assets.
Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted cash: Cash that is subject to legal restrictions or is unavailable for general operating purposes is classified as restricted cash and included in Other assets in the Company's Consolidated Balance Sheets.
Concentrations of credit risk: Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, investments, derivative financial instruments and finance receivables.
Accumulated other comprehensive loss: The Company records unrealized gains and losses on certain available-for-sale investments and foreign currency translation adjustments in other comprehensive income ("OCI"). Unrealized gains and losses on available for sale investments are reclassified to earnings as the gains or losses are realized upon sale of the securities. Translation gains or losses on foreign currency translation adjustments are reclassified to earnings upon the substantial sale or liquidation of investments in international operations. For the Company’s derivative financial instruments that are designated as hedging instruments, the change in fair value is recorded in OCI.
Investments:
Debt Securities: The Company determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are carried at amortized cost. Debt securities which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Available-for-sale securities are carried at fair market value. Fair value is determined using quoted market prices. Unrealized gains and losses are included in comprehensive income and reported in stockholders' equity. The Company evaluates debt securities for impairment. When there has been a decline in fair value below the amortized cost, the Company recognizes an impairment if: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery of the amortized cost; or (3) it does not expect to recover the entire amortized cost of the security. If the Company identifies that the decline in fair value has resulted from credit losses, the credit loss component is recognized as an allowance in the Consolidated Balance Sheets with a corresponding charge to Other expense in the Consolidated Income Statements. The non-credit loss component remains in Other comprehensive loss until realized from a sale or subsequent impairment.
Equity Securities: Investments in equity securities are measured at fair value with unrealized gains and losses reported in earnings.
Equity Method Investments:Equity investments that are not consolidated, but over which the Company exercises significant influence, are accounted for as equity method investments. Whether or not the Company exercises significant influence with respect to an investee company depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not
53
PRA Group, Inc.
Notes to Consolidated Financial Statements
reflected within the Company’s Consolidated Balance Sheets and Income Statements; rather, the Company’s share of the earnings or losses of the investee company is reflected in Other revenue in the Consolidated Income Statements. The Company’s carrying value in an equity method investee company is reflected in Investments in the Company’s Consolidated Balance Sheets.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s Consolidated Financial Statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Finance receivables and income recognition: The Company's financial assets (or a group of financial assets) are measured at amortized cost and presented at the net amount expected to be collected.
Credit quality information: The Company acquires portfolios of accounts that have experienced deterioration of credit quality between origination and the Company's acquisition of the accounts. The amount paid for a portfolio reflects the Company's determination that it is probable the Company will be unable to collect all amounts due according to an account's contractual terms. The Company accounts for the portfolios in accordance with the guidance for purchased credit deteriorated ("PCD") assets. The initial allowance for credit losses is added to the purchase price rather than recorded as a credit loss expense. The Company has established a policy to write off the amortized cost of individual assets when it deems probable that it will not collect on an individual asset. Due to the deteriorated credit quality of the individual accounts, the Company may write off the unpaid principal balance of all accounts in a portfolio at the time of acquisition. However, when the Company has an expectation of collecting cash flows at the portfolio level, a negative allowance is established for expected recoveries at an amount not to exceed the amount paid for the financial portfolios. The negative allowance is recorded as an asset and presented as Finance receivables, net in the Company's Consolidated Balance Sheets.
Portfolio segments: The Company develops systematic methodologies to determine its allowance for credit losses at the portfolio segment level. The Company’s nonperforming loan portfolio segments consist of two broad categories: Core and Insolvency. The Company’s Core portfolios contain loan accounts that are in default and that were purchased at a substantial discount to face value because either the credit originator and/or other third-party collection agencies have been unsuccessful in collecting the full balance owed. The Company’s Insolvency portfolios contain loan accounts that are in default and the customer is involved in a bankruptcy or insolvency proceeding and the accounts were purchased at a substantial discount to face value. Each of the two broad portfolio segments of purchased nonperforming loan portfolios consist of large numbers of homogeneous receivables with similar risk characteristics.
Effective interest rate and accounting pools: Within each portfolio segment, the Company pools accounts with similar risk characteristics that are acquired in the same year. Similar risk characteristics generally include portfolio segment and geographic region. The initial effective interest rate of the pool is established based on the purchase price and expected recoveries of each individual purchase at the purchase date. During the year of acquisition, the annual pool is aggregated, and the blended effective interest rate will adjust to reflect new acquisitions and new cash flow estimates until the end of the year. The effective interest rate for a pool is fixed for the remaining life of the pool once the year has ended.
Methodology: The Company develops its estimates of expected recoveries by applying discounted cash flow methodologies to its estimated remaining collections ("ERC") and recognizes income over the estimated life of the pool at the constant effective interest rate of the pool. Subsequent changes (favorable and unfavorable) in expected cash flows are recognized within Changes in expected recoveries in the Consolidated Income Statements by recording the present value of those changes in ERC at a constant effective interest rate. Amounts included in the estimate of recoveries do not exceed the aggregate amount of the amortized cost basis previously written off or expected to be written off.
The measurement of expected recoveries is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Development of the Company’s forecasts rely on both quantitative and qualitative factors. Qualitative factors can include both external and internal information and consider management’s view on available facts and circumstances at each reporting period. More specifically, external factors that may have an impact on the collectability, and subsequently on the overall profitability of acquired portfolios of nonperforming loans, would include new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors that may have an impact on the collectability, and subsequently the overall profitability of acquired portfolios of nonperforming loans, would include necessary revisions to initial and post-acquisition operational scoring and modeling estimates, operational activities and the expected impact of operational strategies.
54
PRA Group, Inc.
Notes to Consolidated Financial Statements
Portfolio income: The recognition of income on expected recoveries is based on the constant effective interest rate established for a pool.
Changes in expected recoveries: The activity consists of differences between actual and expected recoveries for the reporting period, as well as the net present value of increases or decreases in ERC at the constant effective interest rate.
Agreements to acquire finance receivables include general representations and warranties from the sellers covering matters such as account holder death or insolvency and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days, with certain international agreements extending as long as 24 months. Any funds received from the seller as a return of purchase price are referred to as buybacks. Buyback funds are included in changes in expected recoveries when received.
Fees paid to third parties other than the seller related to the direct acquisition of a portfolio of accounts are expensed when incurred.
Fee income recognition: The Company recognizes revenue from its class action claims recovery services when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the amount is fixed or determinable, and collectability is reasonably assured. This revenue is included within Other revenue in the Company's Consolidated Income Statements.
Property and equipment: Property and equipment, including improvements that significantly add to the productive capacity or extend useful life, are recorded at cost. Maintenance and repairs are expensed as incurred. Property and equipment are depreciated over their useful lives using the straight-line method, as follows:
Category of Property and Equipment Estimated Useful Life
Software and computer equipment Three to five years
Furniture and fixtures Ten years
Equipment Five years
Leasehold improvements Remaining term of the lease
Building improvements Ten to 39 years
When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is included in the Company's Consolidated Income Statements. Impairment is assessed periodically when events or changes in circumstances indicate the carrying value of property and equipment may not be fully recoverable.
Goodwill: Goodwill is not amortized, but rather, is reviewed for impairment annually or more frequently if indicators of potential impairment exist. The Company performs its annual assessment of goodwill as of October 1. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the fair value of the reporting unit is determined. An impairment loss is recorded for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the respective reporting unit.
Income taxes: The Company records a tax provision for the anticipated tax consequences of the reported results of operations. Current tax expense represents the estimated taxes to be paid or refunded for the current period and includes income tax expense related to uncertain tax positions. The Company made an accounting policy election to treat U.S. taxes due in relation to Global Intangible Low-Taxed Income ("GILTI") as a current-period expense when incurred. The provision for income taxes is estimated using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
The Company is subject to income taxes throughout the U.S. and in numerous international jurisdictions. The Company recognizes the financial statement benefits of an uncertain tax position if it is more likely than not to be sustained in the event of challenges by relevant taxing authorities based on the technical merit. The amount of benefits to recognize in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the relevant tax authorities. The Company exercises significant judgment in making these determinations. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense when the more likely than not standards
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PRA Group, Inc.
Notes to Consolidated Financial Statements
are not met. While actual results could vary, the Company believes it has made adequate tax accruals with respect to the ultimate outcome of such tax matters.
A valuation allowance for deferred tax assets is recorded and charged to earnings in the period if it is determined that it is more likely than not that the deferred tax asset will not be realized. If the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the related valuation allowance is reversed, resulting in a positive adjustment to earnings in the period such determination is made. The need for a valuation allowance is determined on a jurisdiction-by-jurisdiction basis.
Leases: The Company recognizes a liability for future lease payments and an ROU asset, representing its right to use the underlying asset for the lease term, in the Consolidated Balance Sheets.
The Company's operating lease portfolio primarily includes corporate offices and call centers. Its leases have remaining lease terms from one to12 years, some of which include options to extend the leases, the longest of which is for up to 10 years; while others include options to terminate the leases in accordance with specified notice periods. Exercises of lease renewal options are typically at the Company's sole discretion, with renewal periods included in ROU assets and lease liabilities based upon whether the Company is reasonably certain of exercising the renewal options and/or not exercising the termination options. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately, and the Company elected not to apply the lease recognition requirements to short-term leases. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
Share-based compensation: Compensation expense associated with share equity awards is recognized in the income statement. The Company determines stock-based compensation expense for all share-based payment awards based on the measurement date fair value. The Company has certain share awards that include market conditions that affect vesting. The fair value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as long as the requisite service is provided. The Company estimates a forfeiture rate for most equity share grants based on historical experience. Time-based equity share awards generally vest between one and three years from the grant date and are expensed on a straight-line basis over the vesting period. Equity share awards that contain a performance metric are expensed over the requisite service period, generally three years, in accordance with the performance level achieved at each reporting period. See Note 11 for additional information.
Earnings per share: Basic EPS is computed by dividing net income available to common stockholders of PRA Group, Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of the conversion spread of the Convertible Notes and nonvested share awards, if they are dilutive. Share-based awards that are contingent upon the attainment of performance goals are included in the computation of diluted EPS if the effect is dilutive. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period.
Derivatives: The Company periodically enters into derivative financial instruments, typically interest rate swap agreements and foreign currency contracts, to reduce its exposure to fluctuations in interest rates on variable-rate debt and foreign currency exchange rates. The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed, nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of the counterparty to assess the counterparty's ability to honor its obligations. Counterparty default would expose the Company to fluctuations in interest and currency rates.
All of the Company's outstanding derivative financial instruments are recognized in the Consolidated Balance Sheets at their fair values. The effect on earnings from recognizing the fair values of these derivative financial instruments depends on their intended use, their hedge designation, and their effectiveness in offsetting changes in the fair values of the exposures they are hedging. Under the cash flow hedge accounting model, changes in the fair values of instruments used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions are reported in equity as a component of Accumulated other comprehensive loss. Amounts in Accumulated other comprehensive loss are reclassified to earnings when the related hedged items affect earnings or the anticipated transactions are no longer probable, with those gains and losses recorded in the same financial statement line-item as the hedged item/forecasted transaction. Changes in the fair values of derivative financial instruments that are not designated as hedges or do not qualify for hedge accounting treatment are reported in earnings. Cash flows from the settlement of derivatives, including both those designated in hedge accounting relationships
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PRA Group, Inc.
Notes to Consolidated Financial Statements
and economic hedges, are reflected in the Consolidated Statements of Cash Flows in the same categories as the cash flows of the hedged item.
For derivative financial instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. The Company assesses, both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures.
The Company discontinues the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. See Note 8 for additional information.
Use of estimates: The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates have been made by management with respect to the:
•timing and amount of future cash collections of the Company's finance receivables portfolios;
•determination of fair value of a reporting unit as part of testing goodwill for impairment; and
•interpretation of the tax laws required to calculate the Company's income tax-related balances.
Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur within one year.
Commitments and contingencies: The Company is subject to various claims and contingencies related to lawsuits, certain taxes and commitments under contractual and other obligations. The Company recognizes liabilities for commitments and contingencies when a loss is probable and estimable. The Company expenses related legal costs as incurred. See Note 14 for additional information.
Estimated fair value of financial instruments: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company takes into consideration differing levels of inputs in the determination of fair values. Disclosure of the estimated fair values of financial instruments often requires the use of estimates. See Note 9 for additional information.
Recent accounting pronouncements:
Recently issued accounting pronouncements adopted:
The Company has determined that no recently issued and adopted accounting pronouncements have had, or are expected to have, a material effect on the Company's Consolidated Financial Statements.
Recently issued accounting pronouncements not yet adopted:
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which, among other updates, requires enhanced disclosures about significant segment expenses regularly provided to the chief operating decision maker, as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. Early adoption is permitted. The Company is evaluating the impact of ASU 2023-07 on its Consolidated Financial Statements and the related disclosures.
In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"), which requires enhanced annual disclosures with respect to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, and may be adopted on a prospective or retrospective basis. Early adoption is permitted. The Company is evaluating the impact of ASU 2023-07 on its Consolidated Financial Statements and the related disclosures.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
The Company has determined that no other recently issued but not yet adopted accounting pronouncements are expected to have a material effect on the Company's Consolidated Financial Statements.
2. Finance Receivables, net:
Finance receivables, net consisted of the following as of December 31, 2023 and 2022 (amounts in thousands):
Amortized cost $ — $ —
Changes in the negative allowance for expected recoveries by portfolio segment for the years ended December 31, 2023 and 2022 were as follows (amounts in thousands):
Core Insolvency Total
Core Insolvency Total
(1) Initial negative allowance for expected recoveries - portfolio acquisitions
Portfolio acquisitions for the years ended December 31, 2023 and 2022 were as follows (amounts in thousands):
Core Insolvency Total
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PRA Group, Inc.
Notes to Consolidated Financial Statements
Core Insolvency Total
The initial negative allowance recorded on portfolio acquisitions for the years ended December 31, 2023 and 2022 were as follows (amounts in thousands):
Core Insolvency Total
Core Insolvency Total
(2) Recoveries applied to negative allowance
Recoveries applied to the negative allowance for the years ended December 31, 2023 and 2022 were as follows (amounts in thousands):
Core Insolvency Total
Core Insolvency Total
(a) Recoveries includes cash collections, buybacks and other cash-based adjustments.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
(3) Changes in expected recoveries
Changes in expected recoveries for the years ended December 31, 2023 and 2022 were as follows (amounts in thousands):
Core Insolvency Total
Core Insolvency Total
In order to estimate future cash collections, the Company considers historical collections performance and its view of current and future economic conditions and consumer habits in the various geographies in which the Company operates. Based on these considerations, the Company’s estimates of ERC incorporate changes in both the amounts and the timing of expected cash collections over the forecast period.
Changes in expected recoveries for the year ended December 31, 2023 were a net positive $29.1 million. This was comprised of $65.1 million in recoveries received in excess of forecast (cash collections overperformance), due in large part to collections performance in Europe, and a $36.0 million negative adjustment to changes in expected future recoveries, primarily due to adjustments made in certain U.S. pools.
For the year ended December 31, 2022, changes in expected recoveries were a net positive $168.9 million. The changes were the net result of $106.7 million in recoveries received in excess of forecast, reflecting cash collections overperformance during the year, and a $62.2 million net positive adjustment to changes in expected future recoveries. The changes in expected future recoveries reflect the Company's assessment of certain pools, where continued strong performance resulted in a net increase to the Company's ERC.
3. Investments:
Investments consisted of the following as of December 31, 2023 and 2022 (amounts in thousands):
Debt securities
Equity securities
Debt Securities
Available-for-Sale
Government securities: The Company's investments in government instruments, consisting of Swedish treasury securities as of December 31, 2023 (Norwegian bonds and Swedish treasury securities as of December 31, 2022), are classified as available-for-sale and stated at fair value. The December 31, 2023 balance of $59.5 million matures within one year.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
The amortized cost and fair value of investments in debt securities as of December 31, 2023 and 2022, were as follows (amounts in thousands):
Available-for-sale
Available-for-sale
Equity Securities
Private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 1% interest.
Equity Method Investment
The Company has an 11.7% interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil. This investment is accounted for using the equity method because the Company exercises significant influence over RCB’s operating and financial activities. Accordingly, the Company’s investment in RCB is adjusted for the Company’s proportionate share of RCB’s earnings or losses, capital contributions made and distributions received.
4. Goodwill:
The Company performs an annual review of goodwill as of October 1 of each year, or more frequently if indicators of impairment exist. The Company performed its annual review of goodwill as of October 1, 2023, and concluded that goodwill was not impaired. Changes in goodwill for the years ended December 31, 2023 and 2022, were as follows (amounts in thousands):
Change in foreign currency translation adjustment (4,357) (44,342)
5. Leases:
The components of lease expense for the years ended December 31, 2023 and 2022, were as follows (amounts in thousands):
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PRA Group, Inc.
Notes to Consolidated Financial Statements
Supplemental cash flow information and non-cash activity related to leases for the years ended December 31, 2023 and 2022, were as follows (amounts in thousands):
(1) Includes the impact of new leases as well as remeasurements and modifications of existing leases.
Lease term and discount rate information related to operating leases were as follows:
Weighted-average remaining lease term (years) 7.4 8.0
Weighted-average discount rate 4.7 % 4.5 %
Maturities of lease liabilities as of December 31, 2023, were as follows for the years ending December 31, (amounts in thousands):
Operating Leases
Total lease payments 59,842
Less: imputed interest (9,542)
Total present value of lease liabilities $ 50,300
6. Property and Equipment, net:
Property and equipment, net consisted of the following as of December 31, 2023 and 2022 (amounts in thousands):
Depreciation expense related to property and equipment for the years ended December 31, 2023, 2022 and 2021 was $13.1 million, $14.9 million and $15.1 million, respectively. During the year ended December 31, 2023, the Company recorded an impairment charge of $5.2 million related to Building and improvements. See Note 9 for additional information.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
7. Borrowings:
The Company's borrowings consisted of the following as of December 31, 2023 and 2022 (amounts in thousands):
Less: Debt discount and issuance costs (11,945) (10,393)
(1) Includes the North American revolving credit facility and an unsecured and uncommitted credit agreement with Banco de Occidente (the "Colombian revolving credit facility"). As of December 31, 2023, no amounts were outstanding under the Colombian revolving credit facility ($0.5 million was outstanding as of December 31, 2022).
The following principal payments are due on the Company's borrowings as of December 31, 2023, for the years ending December 31, (amounts in thousands):
During the year ended December 31, 2023, the Company repurchased a total of $4.0 million in aggregate principal amount of the Senior Notes (as defined below).
The Company determined that it was in compliance with the covenants of its financing arrangements as of December 31, 2023.
North American Revolving Credit and Term Loan
The Company has a credit agreement with Bank of America, N.A., as administrative agent, Bank of America, National Association, acting through its Canada branch, as the Canadian Administrative Agent, and a syndicate of lenders named therein (the "North American Credit Agreement"). The total credit facility under the North American Credit Agreement includes an aggregate principal amount of $1.5 billion (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $442.5 million term loan, (ii) a $1.0 billion domestic revolving credit facility, and (iii) a $75.0 million Canadian revolving credit facility. The facility includes an accordion feature for up to $500.0 million in additional commitments (at the option of the lenders) and also provides for up to $25.0 million of letters of credit and a $25.0 million swingline loan sub-limit that would reduce amounts available for borrowing. With the official discontinuation of the London Interbank Offered Rate ("LIBOR") on June 30, 2023, the Company executed an amendment to the North American Credit Agreement to allow for previously outstanding LIBOR borrowings and subsequent borrowings to use the Secured Overnight Financing Rate ("SOFR"). The term and revolving loans accrue interest, at the option of the Company, at either the base rate, Canadian Dollar Offered Rate or SOFR for the applicable term. SOFR borrowings carry an additional 0.10% credit adjustment spread, while all borrowings incur an additional facility margin of 2.25%, or 2.00% if the consolidated senior secured leverage ratio is less than or equal to 1.60 to 1.0. The revolving loans within the credit facilities are subject to a 0% floor. The revolving credit facilities also bear an unused line fee of 0.35% per annum, or 0.30% if the consolidated senior secured leverage ratio is less than or equal to 1.60 to 1.0, payable quarterly in arrears. The North American Credit Agreement matures on July 30, 2026. As of December 31, 2023, total availability under the North American Credit Agreement was $678.7 million, which was comprised of $107.6 million based on current ERC, and $571.1 million additional availability subject to debt covenants, including advance rates.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
Borrowings under the North American Credit Agreement are guaranteed by the Company's U.S. and Canadian subsidiaries (provided that the Canadian subsidiaries only guarantee borrowings under the Canadian revolving credit facility) and are secured by a first priority lien on substantially all of the Company's assets. The North American Credit Agreement contains events of default and restrictive covenants, including the following:
•the ERC borrowing base is 35% for all eligible Core asset pools and 55% for all Insolvency eligible asset pools;
•the Company's consolidated total leverage ratio cannot exceed 3.50 to 1.0 as of the end of any fiscal quarter;
•the Company's consolidated senior secured leverage ratio cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter;
•subject to no default or event of default, cash dividends and distributions during any fiscal year cannot exceed $20.0 million; and
•the Company must maintain positive consolidated income from operations during any fiscal quarter (other than for the quarter ended March 31, 2023).
The outstanding balances and weighted average interest rates by type of borrowing under the credit facility as of December 31, 2023 and 2022, were as follows (dollar amounts in thousands):
United Kingdom ("UK") Revolving Credit Facility
PRA Group Europe Holding I S.a r.l ("PRA Group Europe"), a wholly owned subsidiary of the Company, along with PRA Group UK Limited ("PRA UK") and the Company, as guarantors, are parties to a credit agreement (the "UK Credit Agreement") with the lenders party thereto and MUFG Bank, Ltd., London Branch, as the administrative agent (the "Administrative Agent").
The UK Credit Agreement consists of an $800.0 million revolving credit facility (subject to a borrowing base), and an accordion feature for up to $200.0 million in additional commitments, subject to certain conditions. Borrowings, which are available in U.S. dollars, euro and pounds sterling, accrue interest for the applicable term at SOFR, Sterling Overnight Index Average ("SONIA") or, in the case of euro borrowings, the Euro Interbank Offered Rate ("Euribor") plus an applicable margin of 2.75% per annum or, if the consolidated senior secured leverage ratio is less than or equal to 1.60 to 1.0, an applicable margin of 2.50% per annum. SOFR and SONIA borrowings carry an additional 0.10% credit adjustment spread, while Euribor borrowings carry no additional spread. The UK Credit Agreement also has a commitment fee of 0.30% per annum, payable quarterly in arrears. If the consolidated senior secured leverage ratio is greater than 1.60 to 1.0, the commitment fee increases to 0.35% per annum. The UK Credit Agreement matures on July 30, 2026. As of December 31, 2023, total availability under the UK Credit Agreement was $297.2 million, which was comprised of $59.9 million based on current ERC, and $237.3 million additional availability subject to debt covenants, including advance rates.
The UK Credit Agreement is secured by substantially all of the assets of PRA UK, all of the equity interests in PRA UK and certain equity interests of PRA Group Europe, certain bank accounts of PRA Group Europe and certain intercompany loans extended by PRA Group Europe to PRA UK. The UK Credit Agreement contains events of default and restrictive covenants, including the following:
•the borrowing base equals the sum of up to: (i) 35% of the ERC of PRA UK’s eligible asset pools; plus (ii) 55% of PRA UK’s Insolvency eligible asset pools; minus (iii) certain reserves to be established by the Administrative Agent;
•the Company's consolidated leverage ratio cannot exceed 3.50 to 1.0 as of the end of any fiscal quarter;
•the Company's consolidated senior secured leverage ratio cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter; and
•the Company must maintain positive consolidated income from operations during any fiscal quarter (other than for the quarter ended March 31, 2023).
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PRA Group, Inc.
Notes to Consolidated Financial Statements
The outstanding balance and weighted average interest rate by type of borrowing under the UK Credit Agreement as of December 31, 2023 and 2022, respectively, were as follows (dollar amounts in thousands):
European Revolving Credit Facility
The Company's wholly-owned subsidiary, PRA Group Europe Holding S.a r.l. ("PRA Group Europe Holding"), and its Swiss Branch, PRA Group Europe Holding S.a r.l. ("PRA Group Holding"), Luxembourg, Zug Branch (together, the "Borrowers"), along with certain of its affiliates and the Company, as guarantors, are parties to a credit agreement (the "European Credit Agreement") with the lenders party thereto and DNB Bank ASA as facility agent and security agent (the "Agent").
The European Credit Agreement provides revolving borrowings for an aggregate amount of approximately €730.0 million (subject to the borrowing base) and an uncommitted accordion feature for up to €500.0 million, subject to certain conditions. Borrowings, which are available in euro, Norwegian krone, Danish krone, Swedish krona and Polish zloty, accrue interest at the Interbank Offered Rate plus 2.80% - 3.80% (as determined by the estimated remaining collections ratio ("ERC Ratio") as defined in the European Credit Agreement), bear an unused line fee, currently 1.120% per annum, or 35% of the margin, are subject to a 0% floor, are payable monthly in arrears and mature November 23, 2027. Additionally, the Company has a separate agreement with the Agent for an overdraft facility in the aggregate amount of $40.0 million (subject to the borrowing base), which accrues interest (per currency) at the daily rates as published by the Agent, bears a facility line fee of 0.125% per quarter, payable quarterly in arrears. The European Credit Agreement matures on November 23, 2027. As of December 31, 2023, total availability under the European Credit Agreement (including the overdraft facility) was $307.1 million, which was comprised of $176.9 million based on current ERC, and $130.2 million additional availability subject to debt covenants, including advance rates.
The European Credit Agreement is secured by a first perfected security interest in all of the equity interests in certain operating subsidiaries of the Borrowers, certain intercompany loans and certain shareholder loans extended by the Company to the Borrowers. Further, the Company guarantees all obligations and liabilities under the European Credit Agreement. The European Credit Agreement contains event of default and restrictive covenants including the following:
•the Borrowers' ERC Ratio cannot exceed 45%;
•the Company's consolidated total leverage ratio cannot exceed 3.50 to 1.0 as of the end of any fiscal quarter;
•the Company's consolidated senior secured leverage ratio cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter;
•the Company must maintain positive consolidated income from operations at the end of any fiscal quarter (other than for the quarter ended March 31, 2023);
•interest bearing deposits in AK Nordic AB cannot exceed SEK1.2 billion; and
•the Borrowers' cash collections must meet certain thresholds, measured on a quarterly basis.
The outstanding balances and weighted average interest rates by type of borrowing under the European Credit Agreement and the prior facility credit agreement as of December 31, 2023 and 2022, respectively, were as follows (dollar amounts in thousands):
Senior Notes due 2029
On September 22, 2021, the Company completed the private offering of $350.0 million in aggregate principal amount of its 5.00% Senior Notes due October 1, 2029 (the "2029 Notes"). The 2029 Notes were issued pursuant to an Indenture dated September 22, 2021 (the "2021 Indenture"), between the Company and Regions Bank, as trustee. The 2021 Indenture contains customary terms and covenants, including certain events of default after which the 2029 Notes may be due and payable immediately. The 2029 Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by all of the Company's existing and future domestic restricted subsidiaries that guarantee the North American Credit
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PRA Group, Inc.
Notes to Consolidated Financial Statements
Agreement, subject to certain exceptions. Interest on the 2029 Notes is payable semi-annually, in arrears, on October 1 and April 1 of each year.
On or before October 1, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes at a redemption price of 105.00% plus accrued and unpaid interest with the net cash proceeds of a public offering of common stock of the Company provided, that at least 60% in aggregate principal amount of the 2029 Notes remains outstanding immediately after the occurrence of such redemption and that such redemption will occur within 90 days of the date of the closing of such public offering.
In addition, on or after October 1, 2024, the 2029 Notes may be redeemed, at the Company's option, in whole or in part at a price equal to 102.50% of the aggregate principal amount of the 2029 Notes being redeemed. The applicable redemption price changes if redeemed during the 12 months beginning October 1 of each year to 101.25% for 2025 and then 100% for 2026 and thereafter.
In the event of a change of control, each holder will have the right to require the Company to repurchase all or any part of such holder's 2029 Notes at an offer price equal to 101% of the aggregate principal amount plus accrued and unpaid interest. If the Company sells assets under certain circumstances and does not use the proceeds for specified purposes, the Company will be required to make an offer to repurchase the 2029 Notes at 100% of their principal amount plus accrued and unpaid interest.
Senior Notes due 2028
On February 6, 2023, the Company completed the private offering of $400.0 million in aggregate principal amount of its 8.375% Senior Notes due 2028 ("2028 Notes"). The 2028 Notes were issued pursuant to an Indenture dated February 6, 2023 (the "2023 Indenture"), between the Company and Regions Bank, as trustee. The 2023 Indenture contains customary terms and covenants, including certain events of default after which the 2028 Notes may be due and payable immediately. The 2028 Notes are senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by all of the Company's existing and future domestic restricted subsidiaries that guarantee the North American Credit Agreement, subject to certain exceptions. Interest on the 2028 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year. Substantially all of the net proceeds received from the 2028 Notes were used to retire the 2023 Notes (as defined below). The Company used the remainder of the net proceeds to repay a portion of its outstanding borrowings under the domestic revolving credit facility under the North America Credit Agreement.