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Analyst Blog

Yesterday, Portfolio Recovery Associates Inc. (PRAA - Analyst Report) announced a new five-year credit facility worth $600 million, replacing the current one. The company will use the new facility to finance its operations and for investing in growth initiatives.

Portfolio Recovery’s new credit facility offers various alternatives for borrowing rates for the loans taken under it. These alternatives are similar to those offered under the company’s previous credit facility. However, Portfolio Recovery plans to mainly take loans based on the LIBOR rate, with a spread of about 250 basis points.

The new credit facility will substantially increase the borrowing capacity of the company as Portfolio Recovery had only $214.5 million as the remaining borrowing availability under its old credit facility as of Sep 30, 2012. Thus, the new facility will boost the financial flexibility of the company, thereby allowing it to increase its expenditure on business investments. Moreover, the company expects the new facility to bring down its cost of funds.

Further, the accordion feature of the new credit facility offers Portfolio Recovery the option to apply for an extension of the borrowing capacity for an amount up to $250 million. However, the company intends to keep its borrowings under check, and hence will cautiously evaluate all investment opportunities to invest only in those portfolios, businesses or products that offer adequate returns.

Peer Encore Capital Group, Inc. (ECPG - Snapshot Report) also announced the amendment of its old $555.5 million revolving credit facility in November 2012. The old facility was set to expire by the end of 2013. The amended facility comprises a $425 million revolving credit facility valid for 5 years along with a $100 million term note due in November 2017 and a $50 million term note due in November 2015. Moreover, Encore Capital has the option of increasing the borrowing limit by $200 million using the accordion feature of the credit facility.

Portfolio Recovery currently carries a Zacks #3 Rank (Hold). We maintain a long-term ‘Neutral’ recommendation on the stock. Encore Capital also carries the same Zacks Rank.

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