Earlier this year, I wrote about Asta Funding (ASFI), a company that buys consumer receivables that have been charged off by the receivables originator for pennies on the dollar and then to collect on the receivables. In my earlier post, I showed how ASFI is extremely conservative in accounting for the carrying value of its portfolio, earning a significant amount of cash each year on its zero-basis portfolio (the part of the portfolio that has been fully impaired). Moreover, Mr. Market was going one step further, valuing ASFI at even less than the conservative amount it was carrying on its books!
Another company operating in this space is Asset Acceptance Capital Corp (AACC). Unlike ASFI, AACC amortizes its portfolio over time on a relatively stable basis. Whereas ASFI has been taking unusually large impairments over the last three years (despite steady cash collected from its zero-basis portfolio), reflecting management’s conservatism, AACC’s amortization (which has the same effect as an impairment – essentially removing a portion of the portfolio’s carrying value from the company’s balance sheet) has been relatively steady. The sum of AACC’s historical amortization (~$807 million) far exceeds the sum of ASFI’s historical impairments (~$260 million), and what’s interesting is that AACC collected ~$49 million from its zero basis portfolio last year for a yield of 6%, whereas ASFI collected ~$34 million for a yield of 13%).
All that to say, it appears that AACC’s method of amortizing its portfolio produces more stable earnings than ASFI’s method, and a comparison of the two appears to show that ASFI’s management has been overly conservative in the last three years. Also, it is worth noting that ASFI is the only company in the group (including AACC, and Encore Capital Group (ECPG) and Portfolio Recovery Associates (PRAA)) to trade at a discount to book, despite the fact that its cash collections from off-book assets has been so steady.
It is worth noting that, while I don’t see a large value opportunity in AACC, at least one party is actively trying to unlock value. The D3 Family of Funds is AACC’s largest outside shareholder (16.1% of the company) and it currently trying to get other shareholders to withhold their votes from re-electing Terrence Daniels, a director of AACC and founder and chairman of AACC’s largest shareholder, Quad-C Investors LLC. D3 points to this graph (from a recently filed SC 13D) to show that AACC has been mismanaged:
D3 presents some direct mistakes AACC’s board has made, and for anyone interested in the company, these would be worth checking out. You can find them in D3′s SC-13D filing). It is unclear which party will prevail (though, given Quad-C’s 34% ownership, it would seem D3 has its work cut out for it!), but it is nice to see a party agitating for change. Even if not successful in its direct quest to have Daniel’s removed from the board, D3 may be successful in getting other changes made that would act as a catalyst.
I view ASFI as being the clearer value opportunity – leave your thoughts in the comments below!
Author Disclosure: No position
Talk to Frank about Asset Acceptance Capital Corp.
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