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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________________________________
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________.
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
48-1090909
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
350 Camino De La Reina, Suite 100
San Diego, California
92108
(Address of principal executive offices)
(Zip code)
(877) 445 - 4581
(Registrant’s telephone number, including area code)
3111 Camino Del Rio North, Suite 103, San Diego, California
(Former name, former address and former fiscal year, if changed since last report)
_______________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer  x Accelerated filer   ¨ Non-accelerated filer  ¨ Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share
 
ECPG
 
The NASDAQ Stock Market LLC
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 1, 2019
Common Stock, $0.01 par value
 
30,966,649 shares


Table of Contents


ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
 
 
Page
 
 
Item 1— Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1— Consolidated Financial Statements (Unaudited)
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Cash and cash equivalents
$
167,096

 
$
157,418

Investment in receivable portfolios, net
3,211,587

 
3,137,893

Deferred court costs, net
96,207

 
95,918

Property and equipment, net
117,371

 
115,518

Other assets
338,462

 
257,002

Goodwill
882,884

 
868,126

Total assets
$
4,813,607

 
$
4,631,875

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
195,686

 
$
287,945

Debt, net
3,592,906

 
3,490,633

Other liabilities
150,458

 
33,609

Total liabilities
3,939,050

 
3,812,187

Commitments and contingencies


 


Equity:
 
 
 
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding

 

Common stock, $0.01 par value, 50,000 shares authorized, 30,967 shares and 30,884 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
310

 
309

Additional paid-in capital
208,374

 
208,498

Accumulated earnings
769,443

 
720,189

Accumulated other comprehensive loss
(105,864
)
 
(110,987
)
Total Encore Capital Group, Inc. stockholders’ equity
872,263

 
818,009

Noncontrolling interest
2,294

 
1,679

Total equity
874,557

 
819,688

Total liabilities and equity
$
4,813,607

 
$
4,631,875

The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See Note 9, “Variable Interest Entities” for additional information on the Company’s VIEs.
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Cash and cash equivalents
$
53

 
$
448

Investment in receivable portfolios, net
521,971

 
501,489

Other assets
10,367

 
9,563

Liabilities
 
 
 
Accounts payable and accrued liabilities
$
4,661

 
$
4,556

Debt, net
456,204

 
445,837

Other liabilities
46

 
46

See accompanying notes to consolidated financial statements

3

Table of Contents

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Revenues
 
 
 
Revenue from receivable portfolios
$
311,158

 
$
281,009

Other revenues
34,552

 
35,968

Total revenues
345,710

 
316,977

Allowance reversals on receivable portfolios, net
1,367

 
9,811

Total revenues, adjusted by net allowances
347,077

 
326,788

Operating expenses
 
 
 
Salaries and employee benefits
91,834

 
89,259

Cost of legal collections
49,027

 
53,855

Other operating expenses
29,614

 
33,748

Collection agency commissions
16,002

 
11,754

General and administrative expenses
39,547

 
39,284

Depreciation and amortization
9,995

 
10,436

Total operating expenses
236,019

 
238,336

Income from operations
111,058

 
88,452

Other (expense) income
 
 
 
Interest expense
(54,967
)
 
(57,462
)
Other (expense) income
(2,976
)
 
2,193

Total other expense
(57,943
)
 
(55,269
)
Income from operations before income taxes
53,115

 
33,183

Provision for income taxes
(3,673
)
 
(9,470
)
Net income
49,442

 
23,713

Net income attributable to noncontrolling interest
(188
)
 
(1,886
)
Net income attributable to Encore Capital Group, Inc. stockholders
$
49,254

 
$
21,827

 
 
 
 
Earnings per share attributable to Encore Capital Group, Inc.:
 
 
 
Basic
$
1.58

 
$
0.84

Diluted
$
1.57

 
$
0.83

 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
31,201

 
26,056

Diluted
31,359

 
26,416

See accompanying notes to consolidated financial statements

4

Table of Contents

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited, In Thousands)
 
Three Months Ended
March 31,
 
2019
 
2018
Net income
$
49,442

 
$
23,713

Other comprehensive (loss) income, net of tax:
 
 
 
Change in unrealized gains/losses on derivative instruments:
 
 
 
Unrealized loss on derivative instruments
(2,202
)
 
(669
)
Income tax effect
172

 
(160
)
Unrealized loss on derivative instruments, net of tax
(2,030
)
 
(829
)
Change in foreign currency translation:
 
 
 
Unrealized gain on foreign currency translation
7,580

 
18,505

Other comprehensive income, net of tax
5,550

 
17,676

Comprehensive income
54,992

 
41,389

Comprehensive income attributable to noncontrolling interest:
 
 
 
Net income
(188
)
 
(1,886
)
Unrealized gain on foreign currency translation
(427
)
 
(1,783
)
Comprehensive income attributable to noncontrolling interest
(615
)
 
(3,669
)
Comprehensive income attributable to Encore Capital Group, Inc. stockholders
$
54,377

 
$
37,720

See accompanying notes to consolidated financial statements

5

Table of Contents

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(In Thousands)
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interest
 
Total
Equity
Shares
 
Par
 
Balance at December 31, 2018
30,884

 
$
309

 
$
208,498

 
$
720,189

 
$
(110,987
)
 
$
1,679

 
$
819,688

Net income

 

 

 
49,254

 

 
188

 
49,442

Other comprehensive income, net of tax

 

 

 

 
5,123

 
427

 
5,550

Issuance of share-based awards, net of shares withheld for employee taxes
83

 
1

 
(1,950
)
 

 

 

 
(1,949
)
Stock-based compensation

 

 
1,826

 

 

 

 
1,826

Balance at March 31, 2019
30,967

 
$
310

 
$
208,374

 
$
769,443

 
$
(105,864
)
 
$
2,294

 
$
874,557

 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interest
 
Total
Equity
Shares
 
Par
 
Balance at December 31, 2017
25,801

 
$
258

 
$
42,646

 
$
616,314

 
$
(77,356
)
 
$
(9,929
)
 
$
571,933

Net income

 

 

 
21,827

 

 
702

 
22,529

Other comprehensive income, net of tax

 

 

 

 
15,893

 
170

 
16,063

Change in fair value of redeemable noncontrolling interest

 

 

 
(12,011
)
 

 

 
(12,011
)
Purchase of redeemable noncontrolling interest

 

 
3,424

 

 

 

 
3,424

Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes
111

 
1

 
(2,351
)
 

 

 

 
(2,350
)
Stock-based compensation

 

 
2,276

 

 

 

 
2,276

Other

 

 
(89
)
 

 

 

 
(89
)
Balance at March 31, 2018
25,912

 
$
259

 
$
45,906

 
$
626,130

 
$
(61,463
)
 
$
(9,057
)
 
$
601,775

See accompanying notes to consolidated financial statements


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Table of Contents

ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 
Three Months Ended
March 31,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
49,442

 
$
23,713

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,995

 
10,436

Other non-cash interest expense, net
6,629

 
11,597

Stock-based compensation expense
1,826

 
2,276

Deferred income taxes
19,682

 
5,071

Allowance reversals on receivable portfolios, net
(1,367
)
 
(9,811
)
Other, net
4,081

 
1,342

Changes in operating assets and liabilities
 
 
 
Deferred court costs and other assets
18,725

 
(5,811
)
Prepaid income tax and income taxes payable
(30,247
)
 
(2,245
)
Accounts payable, accrued liabilities and other liabilities
(67,775
)
 
(35,539
)
Net cash provided by operating activities
10,991

 
1,029

Investing activities:
 
 
 
Purchases of receivable portfolios, net of put-backs
(258,635
)
 
(280,909
)
Collections applied to investment in receivable portfolios, net
201,328

 
206,402

Purchases of property and equipment
(10,227
)
 
(11,220
)
Other, net
(1,980
)
 
1,239

Net cash used in investing activities
(69,514
)
 
(84,488
)
Financing activities:
 
 
 
Proceeds from credit facilities
196,263

 
177,449

Repayment of credit facilities
(119,854
)
 
(87,356
)
Taxes paid related to net share settlement of equity awards
(1,950
)
 
(2,571
)
Other, net
(2,912
)
 
(2,884
)
Net cash provided by financing activities
71,547

 
84,638

Net increase in cash and cash equivalents
13,024

 
1,179

Effect of exchange rate changes on cash and cash equivalents
(3,346
)
 
3,820

Cash and cash equivalents, beginning of period
157,418

 
212,139

Cash and cash equivalents, end of period
$
167,096

 
$
217,138


See accompanying notes to consolidated financial statements

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Table of Contents

ENCORE CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates (collectively, “Cabot”) the Company is one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. These are the Company’s primary operations.
Financial Statement Preparation and Presentation
The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Basis of Consolidation
The consolidated financial statements have been prepared in conformity with GAAP and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates variable interest entities for which it is the primary beneficiary. The primary beneficiary has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (2) either the obligation to absorb losses or the right to receive benefits. Refer to Note 9, “Variable Interest Entities,” for further details. All intercompany transactions and balances have been eliminated in consolidation.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. 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. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Translation gains or losses are the material components of accumulated other comprehensive income or loss. Transaction gains and losses are included in other income or expense.
Reclassifications
Certain immaterial reclassifications have been made to the consolidated financial statements to conform to the current year’s presentation.

8

Table of Contents

Change in Accounting Principle
The Company adopted Accounting Standard Codification 842 - Leases (“Topic 842”) as of January 1, 2019, using the transition method in accordance with ASU 2018-11, Leases: Targeted Improvements issued in July 2018. Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating leases.
The adoption of this new standard resulted in the recording of lease assets and lease liabilities for the Company’s operating leases of approximately $89.1 million and $102.7 million, respectively, as of January 1, 2019. The difference between the leased assets and lease liabilities primarily represents lease incentives. All periods prior to January 1, 2019 were presented in accordance with the previous lease accounting standard, and no retrospective adjustments were made to the comparative periods presented. The accounting for finance leases remains substantially unchanged. The adoption of this new standard did not materially impact the Company’s consolidated statements of operations or cash flows, or the Company’s compliance with debt covenants. Refer to Note 11 “Leases” for detailed information on the Company’s leases.
Recent Accounting Pronouncements
Other than the adoption of the standard discussed above, there have been no new accounting pronouncements made effective during the three months ended March 31, 2019 that have significance, or potential significance, to the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 applies a current expected credit loss model which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under ASC 310-30, which provides authoritative guidance for the accounting of the Company’s investment in receivable portfolios.
ASU 2016-13 is effective for reporting periods beginning after December 15, 2019. The guidance will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which ASU 2016-13 is adopted. However, the FASB has determined that financial assets for which the guidance in Subtopic 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality, has previously been applied should prospectively apply the guidance in ASU 2016-13 for purchased financial assets with credit deterioration.
On April 25, 2019, the FASB issued ASU 2019-04 which amended and clarified application of the new standard. The Company is in the process of determining the effects the adoption of ASU 2016-13, as amended by ASU 2019-04, will have on its consolidated financial statements. The Company expects that the new standard could have a significant impact on how it measures and records income recognized on its receivable portfolios. The Company is evaluating the impact of this pronouncement and is in the process of developing its accounting policy. Additionally, the Company has established a project management team and is researching software resources that can assist with the implementation.
With the exception of the standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2019, as compared to the recent accounting pronouncements described in our Annual Report, that have significance, or potential significance, to the Company’s consolidated financial statements.
Note 2: Earnings Per Share
Basic earnings per share are calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the dilutive effect of the convertible and exchangeable senior notes, if applicable.

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Table of Contents

A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2019
 
2018
Net income attributable to Encore Capital Group, Inc. stockholders
$
49,254

 
$
21,827

 
 
 
 
Total weighted-average basic shares outstanding
31,201

 
26,056

Dilutive effect of stock-based awards
158

 
360

Total effect of dilutive securities
31,359

 
26,416

 
 
 
 
Basic earnings per share
$
1.58

 
$
0.84

Diluted earnings per share
$
1.57

 
$
0.83

Anti-dilutive employee stock options outstanding were approximately 217,000 and 13,000 during the three months ended March 31, 2019 and 2018, respectively.
Note 3: Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
Fair Value Measurements as of
March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
837

 
$

 
$
837

Interest rate cap contracts

 
451

 

 
451

Liabilities
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
(38
)
 

 
(38
)
Interest rate swap agreements

 
(6,967
)
 

 
(6,967
)
Contingent consideration

 

 
(6,257
)
 
(6,257
)

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Table of Contents

 
Fair Value Measurements as of
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Interest rate cap contracts
$

 
$
2,023

 
$

 
$
2,023

Liabilities
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
(237
)
 

 
(237
)
Interest rate swap agreements

 
(4,881
)
 

 
(4,881
)
Contingent consideration

 

 
(6,198
)
 
(6,198
)
Derivative Contracts:
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Contingent Consideration:
The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date based on actual and forecasted operating performance.
The following table provides a roll forward of the fair value of contingent consideration for the three months ended March 31, 2019 and year ended December 31, 2018 (in thousands):
 
Amount
Balance at December 31, 2017
$
10,612

Issuance of contingent consideration in connection with acquisition
1,728

Change in fair value of contingent consideration
(5,664
)
Payment of contingent consideration
(271
)
Effect of foreign currency translation
(207
)
Balance at December 31, 2018
6,198

Payment of contingent consideration
(85
)
Effect of foreign currency translation
144

Balance at March 31, 2019
$
6,257

Non-Recurring Fair Value Measurement:
Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined at the time of initial recognition using Level 2 measurements. The fair value estimate of the assets held for sale was approximately $31.1 million and $26.7 million as of March 31, 2019 and December 31, 2018, respectively.
Financial Instruments Not Required To Be Carried At Fair Value
In accordance with the disclosure requirements of ASC Topic 825, Financial Instruments, the table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. The carrying amounts in the following table are recorded in the consolidated statements of financial condition at March 31, 2019 and December 31, 2018 (in thousands):

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Table of Contents

 
March 31, 2019
 
December 31, 2018
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
Financial Assets
 
 
 
 
 
 
 
Investment in receivable portfolios
$
3,211,587

 
$
3,413,480

 
$
3,137,893

 
$
3,525,861

Deferred court costs
96,207

 
96,207

 
95,918

 
95,918

Financial Liabilities
 
 
 
 
 
 
 
Encore convertible notes and exchangeable notes(1)
622,761

 
600,558

 
619,639

 
553,744

Cabot senior secured notes
1,119,265

 
1,103,966

 
1,109,922

 
1,036,905

________________________
(1)
Carrying amount represents the portion of the convertible and exchangeable notes classified as debt, while estimated fair value pertains to the face amount of the notes.
Investment in Receivable Portfolios:
The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios using Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
In the Company’s current analysis, the fair value of investment in receivable portfolios was approximately $3,413.5 million and $3,525.9 million as of March 31, 2019 and December 31, 2018, respectively, as compared to the carrying value of $3,211.6 million and $3,137.9 million as of March 31, 2019 and December 31, 2018, respectively. A 100 basis point increase in the cost to collect and discount rate used would result in a decrease in the fair value of U.S. and European portfolios by approximately $49.9 million and $71.5 million, respectively, as of March 31, 2019. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount which could be realized if its investment in receivable portfolios were sold.
Deferred Court Costs:
The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs was $96.2 million and $95.9 million as of March 31, 2019 and December 31, 2018, respectively, and approximated fair value.
Debt:
The majority of the Company’s borrowings are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities and Cabot’s borrowings under its revolving credit facility. The carrying value of the Company’s revolving credit and term loan facilities approximates fair value due to the short-term nature of the interest rate periods. The fair value of the Company’s senior secured notes was estimated using widely accepted valuation techniques, including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates.
Encore’s convertible notes and exchangeable notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible notes and exchangeable notes was $622.8 million and $619.6 million, net of the debt discount of $33.2 million and $36.4 million as of March 31, 2019 and December 31, 2018, respectively. The fair value estimate for these convertible notes and exchangeable notes, which incorporates quoted market prices using Level 2 inputs, was approximately $600.6 million and $553.7 million as of March 31, 2019 and December 31, 2018, respectively.
Cabot’s senior secured notes are carried at historical cost, adjusted for the debt discount. The carrying value of Cabot’s senior secured notes was $1,119.3 million and $1,109.9 million, net of the debt discount of $1.4 million and $1.5 million as of

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March 31, 2019 and December 31, 2018, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was $1,104.0 million and $1,036.9 million as of March 31, 2019 and December 31, 2018, respectively.
Note 4: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. The Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.
The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated statements of financial condition (in thousands):
 
March 31, 2019
 
December 31, 2018
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Foreign currency exchange contracts
Other assets
 
$
837

 
Other assets
 
$

Interest rate cap contracts
Other assets
 
451

 
Other assets
 
2,023

Foreign currency exchange contracts
Other liabilities
 
(38
)
 
Other liabilities
 
(237
)
Interest rate swap agreements
Other liabilities
 
(6,967
)
 
Other liabilities
 
(4,881
)
Derivatives Designated as Hedging Instruments
The Company has operations in foreign countries which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.
The Company’s foreign currency forward contracts are designated as cash flow hedging instruments and qualify for hedge accounting treatment. Gains and losses arising from such contracts are recorded as a component of accumulated other comprehensive income (“OCI”) as gains and losses on derivative instruments, net of income taxes. The hedging gains and losses in OCI are subsequently reclassified into earnings in the same period in which the underlying transactions affect the Company’s earnings. If all or a portion of the forecasted transaction is cancelled, the accumulated gains or losses in OCI would be reclassified into earnings.
As of March 31, 2019, the total notional amount of the forward contracts that were designated as cash flow hedging instruments was $37.4 million. The Company estimates that approximately $0.5 million of net derivative gain included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the three months ended March 31, 2019 and 2018.
The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. In accordance with authoritative guidance relating to derivatives and hedging transactions, the Company designates its interest rate swap instruments as cash flow hedges. As of March 31, 2019, there were six interest rate swap agreements outstanding with a total notional amount of $368.3 million.
As of March 31, 2019, the Company also held two interest rate cap contracts (the “2018 Caps”) with a notional amount of £350.0 million (approximately $456.2 million) that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate debt. The 2018 Caps mature in 2021 and are structured as a series of European call options (“Caplets”) such that if exercised, the Company will receive a payment equal to 3-months GBP-LIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash flows of the interest payments to the extent GBP-LIBOR exceeds the strike price of the Caplets. The Company expects the hedge relationship to be highly effective and designates the 2018 Caps as cash flow hedge instruments.

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The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments on the Company’s consolidated statements of operations for the three months ended March 31, 2019 and 2018 (in thousands):
Derivatives Designated as Hedging Instruments
 
Gain (Loss)
Recognized in OCI
 
Location of Gain (Loss) Reclassified from
OCI into Income
 
Gain (Loss) Reclassified from OCI into Income
 
Three Months Ended
March 31,
 
 
Three Months Ended March 31,
 
2019
 
2018
 
 
2019
 
2018
Foreign currency exchange contracts
 
$
935

 
$
(107
)
 
Salaries and employee benefits
 
$
(95
)
 
$
549

Foreign currency exchange contracts
 
(78
)
 

 
General and administrative expenses
 
(84
)
 

Interest rate swap agreements
 
(2,086
)
 
9

 
Interest expense
 
(420
)
 

Interest rate cap contracts
 
(1,572
)
 

 
Interest expense
 

 

Derivatives Not Designated as Hedging Instruments
Beginning in 2016 and through the first quarter of 2018, the Company held currency exchange forward contracts to reduce the effect of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts matured within one to three months and were not designated as hedge instruments for accounting purposes. The gains or losses on these derivative contracts were recognized in other income or expense based on fair value changes. The Company recognized a loss of $0.8 million on these derivative contracts during the three months ended March 31, 2018.
As of March 31, 2019, the Company does not have any derivative contracts that are not designated as hedging instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis.
Note 5: Investment in Receivable Portfolios, Net
In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e. the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is a significant increase in subsequent expected cash flows. Subsequent increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. Due to the discounting of future cashflows using monthly IRRs, an allowance charge could still result even if substantially higher collections occurring later in the collection curve offset lower collections in the near term.
The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost

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basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the carrying value of a Cost Recovery Portfolio has been fully recovered.
Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.
The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):
 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2018
$
3,773,171

 
$
253,035

 
$
4,026,206

Revenue from receivable portfolios
(285,255
)
 
(25,903
)
 
(311,158
)
Allowance (reversals) on receivable portfolios, net
900

 
(2,267
)
 
(1,367
)
Additions (reductions) on existing portfolios, net
38,512

 
(199
)
 
38,313

Additions for current purchases
285,637

 

 
285,637

Effect of foreign currency translation
26,244

 
217

 
26,461

Balance at March 31, 2019
$
3,839,209

 
$
224,883

 
$
4,064,092

 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2017
$
3,695,069

 
$
369,632

 
$
4,064,701

Revenue from receivable portfolios
(249,821
)
 
(31,188
)
 
(281,009
)
Allowance reversals on receivable portfolios, net
(8,082
)
 
(1,729
)
 
(9,811
)
Reductions on existing portfolios, net
(24,945
)
 
(39,529
)
 
(64,474
)
Additions for current purchases
285,172

 

 
285,172

Effect of foreign currency translation
57,577

 
643

 
58,220

Balance at March 31, 2018
$
3,754,970

 
$
297,829

 
$
4,052,799

During the three months ended March 31, 2019, the Company purchased receivable portfolios with a face value of $1.7 billion for $262.3 million, or a purchase price of 15.1% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended March 31, 2019 amounted to $548.0 million. During the three months ended March 31, 2018, the Company purchased receivable portfolios with a face value of $1.8 billion for $276.8 million, or a purchase price of 15.4% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended March 31, 2018 amounted to $556.2 million.
All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended March 31, 2019 and 2018, Zero Basis Revenue was approximately $25.9 million and $31.2 million, respectively. During the three months ended March 31, 2019 and 2018, allowance reversals on Zero Basis Portfolios were $2.3 million and $1.7 million, respectively.

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The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages):
 
Three Months Ended March 31, 2019
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
3,129,502

 
$
8,391

 
$

 
$
3,137,893

Purchases of receivable portfolios
262,335

 

 

 
262,335

Disposals or transfers to assets held for sale
(3,145
)
 
(444
)
 

 
(3,589
)
Gross collections(1)
(485,598
)
 
(91
)
 
(28,164
)
 
(513,853
)
Put-Backs and Recalls(2)
(3,694
)
 

 
(6
)
 
(3,700
)
Foreign currency adjustments
20,137

 
(161
)
 

 
19,976

Revenue recognized
285,255

 

 
25,903

 
311,158

Portfolio (allowance) reversals, net
(900
)
 

 
2,267

 
1,367

Balance, end of period
$
3,203,892

 
$
7,695

 
$

 
$
3,211,587

Revenue as a percentage of collections(3)
58.7
%
 
%
 
92.0
%
 
60.6
%
 
Three Months Ended March 31, 2018
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,879,170

 
$
11,443

 
$

 
$
2,890,613

Purchases of receivable portfolios
276,762

 

 

 
276,762

Disposals or transfers to assets held for sale
(3,072
)
 

 

 
(3,072
)
Gross collections(1)
(455,143
)
 
(1,171
)
 
(32,788
)
 
(489,102
)
Put-Backs and Recalls(2)
(3,691
)
 

 
(129
)
 
(3,820
)
Foreign currency adjustments
61,590

 
350

 

 
61,940

Revenue recognized
249,821

 

 
31,188

 
281,009

Portfolio allowance reversals, net
8,082

 

 
1,729

 
9,811

Balance, end of period
$
3,013,519

 
$
10,622

 
$

 
$
3,024,141

Revenue as a percentage of collections(3)
54.9
%
 
%
 
95.1
%
 
57.5
%
________________________
(1)
Does not include amounts collected on behalf of others.
(2)
Put-backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreements.
(3)
Revenue as a percentage of collections excludes the effect of net portfolio allowances or net portfolio allowance reversals.

The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands):
 
Valuation Allowance
 
Three Months Ended March 31,
 
2019
 
2018
Balance at beginning of period
$
60,631

 
$
102,576

Provision for portfolio allowances
2,626

 
940

Reversal of prior allowances
(3,993
)
 
(10,751
)
Effect of foreign currency translation
164

 
1,552

Balance at end of period
$
59,428

 
$
94,317


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Note 6: Deferred Court Costs, Net
The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections the Company is required to pay certain upfront costs to the applicable courts that are recoverable from the consumer (“Deferred Court Costs”).
The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve for those costs that it believes will ultimately be uncollectible. The Company determines the reserve based on an estimated court cost recovery rate established based on its analysis of historical court costs recovery data. The Company estimates deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and writes off any Deferred Court Costs not recovered within the respective deferral period. Collections received from debtors are first applied against related court costs with the balance applied to the debtors’ account balance.
Deferred Court Costs for the deferral period consist of the following as of the dates presented (in thousands):
 
March 31,
2019
 
December 31,
2018
Court costs advanced
$
840,721

 
$
828,713

Court costs recovered
(344,523
)
 
(336,335
)
Court costs reserve
(399,991
)
 
(396,460
)
Deferred court costs
$
96,207

 
$
95,918

A roll forward of the Company’s court cost reserve is as follows (in thousands):
 
Court Cost Reserve
 
Three Months Ended
March 31,
 
2019
 
2018
Balance at beginning of period
$
(396,460
)
 
$
(364,015
)
Provision for court costs
(15,713
)
 
(25,067
)
Net down of reserve after deferral period
13,779

 
12,952

Effect of foreign currency translation
(1,597
)
 
(2,060
)
Balance at end of period
$
(399,991
)
 
$
(378,190
)
Note 7: Other Assets
Other assets consist of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Operating lease right-of-use asset
$
91,045

 
$

Identifiable intangible assets, net
59,383

 
60,581

Service fee receivables
35,841

 
28,035

Assets held for sale
31,088

 
26,664

Other financial receivables
26,691

 
47,363

Prepaid expenses
22,379

 
24,989

Income tax receivable
11,773

 

Deferred tax assets
10,849

 
24,910

Other
49,413

 
44,460

Total
$
338,462

 
$
257,002


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Note 8: Debt, Net
The Company is in compliance with all covenants under its financing arrangements as of March 31, 2019. The components of the Company’s consolidated debt and capital lease obligations were as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Encore revolving credit facility
$
500,000

 
$
429,000

Encore term loan facility
183,142

 
195,056

Encore senior secured notes
325,000

 
325,000

Encore convertible notes and exchangeable notes
656,000

 
656,000

Less: debt discount
(33,239
)
 
(36,361
)
Cabot senior secured notes
1,120,657

 
1,111,399

Less: debt discount
(1,392
)
 
(1,477
)
Cabot senior revolving credit facility
319,760

 
298,005

Cabot securitisation senior facilities
456,204

 
445,837

Other credit facilities
43,794

 
43,354

Other
61,583

 
64,566

Finance lease liabilities
5,904

 
7,563

 
3,637,413

 
3,537,942

Less: debt issuance costs, net of amortization
(44,507
)
 
(47,309
)
Total
$
3,592,906

 
$
3,490,633

Encore Revolving Credit Facility and Term Loan Facility
The Company has a revolving credit facility (the “Revolving Credit Facility”) and term loan facility (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”) pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”).
Provisions of the Restated Credit Agreement as of March 31, 2019 include, but are not limited to:
Revolving Credit Facility commitments of $884.2 million that expire in December 2021 with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the cash flow leverage ratio of Encore and its restricted subsidiaries as defined in the Restated Credit Agreement; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (i) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (ii) the federal funds effective rate from time to time, plus 0.5% per annum, (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum and (iv) zero;
A $194.6 million term loan maturing in December 2021, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. Principal amortizes $15.3 million in each of 2019 and 2020 with the remaining principal due in 2021;
A borrowing base under the Revolving Credit Facility equal to 35% of all eligible non-bankruptcy estimated remaining collections plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy;
A maximum cash flow leverage ratio permitted of 3.00:1.00;
A maximum cash flow first-lien leverage ratio of 2.00:1.00;
A minimum interest coverage ratio of 1.75:1.00;
The allowance of indebtedness in the form of senior secured notes not to exceed $350.0 million;

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The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion, including junior lien indebtedness not to exceed $400.0 million;
Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations;
Repurchases of up to $150.0 million of Encore’s common stock after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity;
A change of control definition, that excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK I, LP and their respective affiliates of up to 50% of the outstanding shares of Encore’s voting stock;
Events of default which, upon occurrence, may permit the lenders to terminate the facility and declare all amounts outstanding to be immediately due and payable;
A pre-approved acquisition limit of $225.0 million per fiscal year;
A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of Encore and its restricted subsidiaries; and (2) an unlimited amount such that after giving effect to the making of any investment, the cash flow leverage ratio is less than 1.25:1:00;
A basket to allow for investments in persons organized under the laws of Canada in the amount of $50.0 million;
Collateralization by all assets of the Company, other than the assets of certain foreign subsidiaries and all unrestricted subsidiaries as defined in the Restated Credit Agreement.
At March 31, 2019, the outstanding balance under the Revolving Credit Facility was $500.0 million, which bore a weighted average interest rate of 5.50% and 4.62% for the three months ended March 31, 2019 and 2018, respectively. Available capacity under the Revolving Credit Facility, after taking into account borrowing base and applicable debt covenants, was $138.8 million as of March 31, 2019. At March 31, 2019, the outstanding balance under the Term Loan Facility was $183.1 million.
Encore Senior Secured Notes
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Senior Secured Notes”). The Senior Secured Notes bear an annual interest rate of 5.625%, mature in 2024 and beginning in November 2019 will require quarterly principal payments of $16.3 million. As of March 31, 2019, $325.0 million of the Senior Secured Notes remained outstanding.
The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. The Senior Secured Notes are pari passu with, and are collateralized by the same collateral as, the Senior Secured Credit Facilities. The Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon certain events of default, including certain events related to insolvency, bankruptcy, or liquidation. Additionally, any series of the Senior Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of such series of Senior Secured Notes upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors, collateral, minimum revolving credit facility commitment or the breach of any negative covenant. Encore may prepay the Senior Secured Notes at any time for any reason. If Encore prepays the Senior Secured Notes, payment will be at the higher of par or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid. The discount rate used to determine the present value is 50 basis points over the then current Treasury Rate corresponding to the remaining average life of the Senior Secured Notes. The covenants and material terms in the purchase agreement for the Senior Secured Notes are substantially similar to those in the Restated Credit Agreement. The holders of the Senior Secured Notes and the administrative agent for the lenders of the Restated Credit Agreement have an intercreditor agreement related to their pro rata rights to the collateral, actionable default, powers and duties and remedies, among other topics.
Encore Convertible Notes and Exchangeable Notes
In June and July 2013, Encore issued $172.5 million aggregate principal amount of 3.000% 2020 Convertible Notes that mature on July 1, 2020 in private placement transactions (the “2020 Convertible Notes”). In March 2014, Encore issued $161.0 million aggregate principal amount of 2.875% 2021 Convertible Notes that mature on March 15, 2021 in private placement transactions (the “2021 Convertible Notes”). In March 2017, Encore issued $150.0 million aggregate principal amount of 3.250% 2022 Convertible Senior Notes that mature on March 15, 2022 in private placement transactions (the “2022 Convertible Notes” and together with the 2020 Convertible Notes and the 2021 Convertible Notes, the “Convertible Notes”). The interest on the Convertible Notes is payable semi-annually.

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In July 2018, Encore Finance (defined below), a 100% owned finance subsidiary of Encore, issued $172.5 million aggregate principal amount of exchangeable senior notes due 2023 (the “Exchangeable Notes”) which are fully and unconditionally guaranteed by Encore. The Exchangeable Notes mature on September 1, 2023 and bear interest at a rate of 4.500% per year, payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2019.
Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned finance subsidiary of Encore. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent to April 30, 2018, the date of the incorporation of Encore Finance.
Prior to the close of business on the business day immediately preceding their respective conversion or exchange date (listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances set forth in the applicable indentures. On or after their respective conversion or exchange dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their notes at any time. Certain key terms related to the convertible and exchangeable features as of March 31, 2019 are listed below.
 
2020 Convertible Notes
 
2021 Convertible Notes
 
2022 Convertible Notes
 
2023 Exchangeable Notes
Initial conversion or exchange price
$
45.72

 
$
59.39

 
$
45.57

 
$
44.62

Closing stock price at date of issuance
$
33.35

 
$
47.51

 
$
35.05

 
$
36.45

Closing stock price date
June 24, 2013

 
March 5, 2014

 
February 27, 2017

 
July 20, 2018

Conversion or exchange rate (shares per $1,000 principal amount)
21.8718

 
16.8386

 
21.9467

 
22.4090

Conversion or exchange date
January 1, 2020

 
September 15, 2020

 
September 15, 2021

 
March 1, 2023

In the event of conversion or exchange, holders of the Company’s Convertible Notes or Exchangeable Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions and exchanges through combination settlement (i.e., convertible or exchangeable into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes and Exchangeable Notes, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion or exchange spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion or exchange spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion or exchange prices listed in the above table.
Authoritative guidance requires that issuers of convertible or exchangeable debt instruments which, upon conversion or exchange, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible or nonexchangeable debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.
As discussed above, upon exchange of the Exchangeable Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes and Exchangeable Notes are listed below (in thousands, except percentages):
 
2020 Convertible Notes
 
2021 Convertible Notes
 
2022 Convertible Notes
 
2023 Exchangeable Notes
Debt component
$
140,247

 
$
143,645

 
$
137,266

 
$
157,971

Equity component
$
32,253

 
$
17,355

 
$
12,734

 
$
14,009

Equity issuance cost
$
1,106

 
$
581

 
$
398

 
$

Stated interest rate
3.000
%
 
2.875
%
 
3.250
%
 
4.500
%
Effective interest rate
6.350
%
 
4.700
%
 
5.200
%
 
6.500
%

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The balances of the liability and equity components of all the Convertible Notes and Exchangeable Notes outstanding were as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Liability component—principal amount
$
656,000

 
$
656,000

Unamortized debt discount
(33,239
)
 
(36,361
)
Liability component—net carrying amount
$
622,761

 
$
619,639

Equity component
$
76,351

 
$
76,351

The debt discount is being amortized into interest expense over the remaining life of the Convertible Notes and Exchangeable Notes using the effective interest rates. Interest expense related to the Convertible Notes and Exchangeable Notes was as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Interest expense—stated coupon rate
$
5,337

 
$
3,642

Interest expense—amortization of debt discount
3,121

 
2,428

Total interest expense—Convertible Notes and Exchangeable Notes
$
8,458

 
$
6,070

Hedge Transactions
In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be required to make in the event that the market price of the Company’s common stock becomes greater than the conversion or exchange prices of the Convertible Notes and the Exchangeable Notes, the Company maintains a hedge program that increases the effective conversion or exchange price for the 2020 Convertible Notes, the 2021 Convertible Notes and the Exchangeable Notes. The Company did not hedge the 2022 Convertible Notes.
The details of the hedge program for each of the Convertible Notes and Exchangeable Notes are listed below (in thousands, except conversion price):
 
2020 Convertible Notes
 
2021 Convertible Notes
 
2023 Exchangeable Notes
Cost of the hedge transaction(s)
$
18,113

 
$
19,545

 
$
17,785

Initial conversion or exchange price
$
45.72

 
$
59.39

 
$
44.62

Effective conversion or exchange price
$
61.55

 
$
83.14

 
$
62.48

Cabot Senior Secured Notes
In March 2014, Cabot Financial (Luxembourg) S.A. (“Cabot Financial”) issued £175.0 million (approximately $291.8 million) in aggregate principal amount of 6.500% Senior Secured Notes due 2021 (the “Cabot 2021 Notes”). Interest on the Cabot 2021 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year. In July 2018, Cabot Financial completed an exchange offer for a portion of these outstanding notes, as further discussed below.
In October 2016, Cabot Financial issued £350.0 million (approximately $442.6 million) in aggregate principal amount of 7.500% Senior Secured Notes due 2023 (the “Cabot 2023 Notes”). Interest on the Cabot 2023 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year. The Cabot 2023 Notes were issued at a price equal to 100% of their face value.
In July 2018, Cabot Financial completed an exchange offer whereby certain holders of Senior Secured Notes due 2020 (the “Cabot 2020 Notes”) and holders of the Cabot 2021 Notes exchanged their notes for additional Cabot 2023 Notes (the “Exchange Notes”). Pursuant to the exchange offer, Cabot Financial exchanged £32.2 million (approximately $42.4 million) in aggregate principal amount of the Cabot 2020 Notes and £95.0 million (approximately $125.2 million) in aggregate principal amount of the Cabot 2021 Notes, at a premium, for a total of £128.4 million (approximately $169.2 million) aggregate principal amount of the Exchange Notes. In July 2018, Cabot Financial also issued £34.5 million (approximately $45.5 million) aggregate principal amount of 7.500% additional notes (the “Additional Notes”) at 99.0% plus accrued interest from and

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including April 1, 2018. Both the Exchange Notes and the Additional Notes were issued as additional notes under the indenture entered into by Cabot Financial, among others, dated October 6, 2016, governing the Cabot 2023 Notes and are part of the same series as the currently outstanding £350.0 million 7.500% Cabot 2023 Notes issued under that indenture.
The Cabot 2021 Notes and the Cabot 2023 Notes (together the “Cabot Notes”) are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries of the Company: CCM, Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited (other than Cabot Financial and Marlin Intermediate Holdings plc). The Cabot Notes are secured by a first ranking security interest in all the outstanding shares of Cabot Financial and the guarantors (other than CCM and Marlin Midway Limited) and substantially all the assets of Cabot Financial and the guarantors (other than CCM). Subject to the Intercreditor Agreement described below under “Cabot Senior Revolving Credit Facility”, the guarantees provided in respect of the Cabot Notes are pari passu with each such guarantee given in respect of the Cabot Floating Rate Notes, Marlin Bonds and the Cabot Credit Facility described below.
In November 2015, Cabot Financial (Luxembourg) II S.A. (“Cabot Financial II”), an indirect subsidiary of Encore, issued €310.0 million (approximately $332.2 million) in aggregate principal amount of Senior Secured Floating Rate Notes due 2021 (the “Cabot Floating Rate Notes”). The Cabot Floating Rate Notes were issued at a 1%, or €3.1 million (approximately $3.4 million), original issue discount, which is being amortized over the life of the notes and included as interest expense in the Company’s consolidated statements of operations. The Cabot Floating Rate Notes bear interest at a rate equal to three-month EURIBOR plus 5.875% per annum, reset quarterly. Interest on the Cabot Floating Rate Notes is payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year. The Cabot Floating Rate Notes will mature on November 15, 2021.
The Cabot Floating Rate Notes are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries of the Company: CCM, Cabot Financial Limited and all material subsidiaries of Cabot Financial Limited (other than Cabot Financial II and Marlin Intermediate Holdings plc). The Cabot Floating Rate Notes are secured by a first-ranking security interest in all the outstanding shares of Cabot Financial II and the guarantors (other than CCM and Marlin Midway Limited) and substantially all the assets of Cabot Financial II and the guarantors (other than CCM).
Interest expense related to the Cabot senior secured notes was as follows (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Interest expense—stated coupon rate
$
23,655

 
$
21,600

Interest expense—amortization of debt discount
119

 
(116
)
Total interest expense—Cabot senior secured notes
$
23,774

 
$
21,484

At March 31, 2019, the outstanding balance of the Cabot senior secured notes was $1.1 billion.
Cabot Senior Revolving Credit Facilities
On December 12, 2017, Cabot Financial (UK) Limited (“Cabot Financial UK”) entered into an amended and restated senior secured revolving credit facility agreement (as amended and restated, the “Cabot Credit Facility”). As of March 31, 2019, the Cabot Credit Facility provides for a total committed facility of £385.0 million of which £375.0 million expires in September 2022 and £10.0 million that expires in September 2021, and included the following key provisions:
Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.00% per annum, which may decrease to 2.75% upon certain specified conditions;
A restrictive covenant that limits the loan to value ratio to 0.75 in the event that the Cabot Credit Facility is more than 20% utilized;
A restrictive covenant that limits the super senior loan (i.e. the Cabot Credit Facility and any super priority hedging liabilities) to value ratio to 0.275 in the event that the Cabot Credit Facility is more than 20% utilized;
Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and
Events of default which, upon occurrence, may permit the lenders to terminate the Cabot Credit Facility and declare all amounts outstanding to be immediately due and payable.

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The Cabot Credit Facility is unconditionally guaranteed by the following indirect subsidiaries of the Company: CCM, Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited. The Cabot Credit Facility is secured by first ranking security interests in all the outstanding shares of Cabot Financial UK and the guarantors (other than CCM) and substantially all the assets of Cabot Financial UK and the guarantors (other than CCM). Pursuant to the terms of intercreditor agreements entered into with respect to the relative positions of the Cabot Notes, the Cabot Floating Rate Notes, and the Cabot Credit Facility, any liabilities in respect of obligations under the Cabot Credit Facility that are secured by assets that also secure the Cabot Notes, the Cabot Floating Rate Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
At March 31, 2019, the outstanding borrowings under the Cabot Credit Facilities were approximately $319.8 million. The weighted average interest rate was 3.37% and 3.75% for the three months ended March 31, 2019 and 2018, respectively. Available capacity under the Cabot Credit Facility, after taking into account borrowing base and applicable debt covenants, was £139.8 million (approximately $182.2 million) as of March 31, 2019.
Cabot Securitisation Senior Facility
Cabot’s wholly owned subsidiary Cabot Securitisation UK Ltd (“Cabot Securitisation”) entered into a senior facility agreement (the “Senior Facility Agreement”) for a committed amount of £300.0 million, of which £300.0 million was drawn as of March 31, 2019. The Senior Facility Agreement matures in September 2023. The obligations of Cabot Securitisation under the Senior Facility Agreement are secured by first ranking security interests over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from time to time), the book value of which was approximately £332.7 million (approximately $433.7 million) as of March 31, 2019. Funds drawn under the Senior Facility Agreement will bear interest at a rate per annum equal to LIBOR plus a margin of 2.85%.
In November 2018, Cabot’s wholly owned subsidiary Cabot Securitisation UK II Ltd (“Cabot Securitisation II”) entered into a new non-recourse asset backed senior facility of £50.0 million, with a maturity date in September 2023. The facility is secured by first ranking security interests over all of Cabot Securitisation II’s property, assets and rights (including receivables purchased from Cabot Financial UK from time to time), the book value of which was approximately £55.9 million (approximately $72.8 million) as of March 31, 2019. Funds drawn under this facility will bear interest at a rate per annum equal to LIBOR plus a margin of 4.075%.
At March 31, 2019, the outstanding borrowings under the Cabot Securitisation Senior Facility were approximately $456.2 million. The weighted average interest rate was 3.76% and 3.35% for the three months ended March 31, 2019 and 2018, respectively.
Cabot Securitisation and Cabot Securitisation II are securitized financing vehicles and are VIEs for consolidation purposes. Refer to Note 9, “Variable Interest Entities,” for further details.
Finance Lease Liabilities
The Company has finance lease liabilities primarily for computer equipment. As of March 31, 2019, the Company’s finance lease liabilities were approximately $5.9 million. These finance lease liabilities require monthly, quarterly or annual payments through 2023 and have implicit interest rates that range from 3.0% to approximately 5.7%.
Note 9: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary.
The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. A reconsideration event is significant if it changes the design of the entity or the entity’s equity investment at risk. Prior to the purchase of all of the outstanding equity of CCM not owned by the Company, CCM’s indirect holding Company Janus Holdings S.a r.l. (“Janus Holdings”) was a VIE. Upon completion of the Cabot Transaction on July 24, 2018 and the subsequent change in organizational structure, Janus Holdings no longer qualified as a VIE and CCM is consolidated via the voting interest model.

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As of March 31, 2019, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs.
Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the VIE.
Note 10: Income Taxes
Income tax expense was $3.7 million and $9.5 million during the three months ended March 31, 2019 and 2018, respectively. The decrease in income tax expense for the three months ended March 31, 2019 as compared to the corresponding period in 2018 was primarily due to the recording of a tax benefit of approximately $9.1 million related to a tax accounting method change for revenue reporting approved by the Internal Revenue Service (“IRS”) during the three months ended March 31, 2019.
The effective tax rates for the respective periods are shown below:
 
Three Months Ended
March 31,
 
2019
 
2018
Federal provision
21.0
 %
 
21.0
 %
State provision
2.5
 %
 
1.4
 %
Change in valuation allowance
1.9
 %
 
14.2
 %
Foreign income taxed at different rates(1)
(0.9
)%
 
(7.2
)%
Change in tax accounting method(2)
(17.1
)%
 
 %
Other
(0.5
)%
 
(0.9
)%
Effective rate
6.9
 %
 
28.5
 %
________________________
(1)
Relates primarily to lower tax rates attributable to international operations.
(2)
During the first quarter of 2019, the Company received IRS approval for a tax accounting method change related to revenue reporting. The revised tax accounting method more closely aligns with the Company’s book accounting method for revenue reporting. 
In accordance with the authoritative guidance for income taxes, each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective income tax rate. The estimated annual effective tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected amounts for the year. Since the Company operates in foreign countries with varying tax rates, the magnitude of the impact of the results the international operations has on the Company’s quarterly effective tax rate is dependent on the level of income or loss from the international operations in the period.
The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026 and a 50% tax holiday for the subsequent four years. The impact of the tax holiday in Costa Rica for the three months ended March 31, 2019 and 2018, was immaterial.
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $19.9 million at March 31, 2019. These unrecognized tax benefits, if recognized, would result in a net tax benefit of $13.0 million as of March 31, 2019. There were no material changes in gross unrecognized tax benefits from December 31, 2018.
Of the $167.1 million of cash and cash equivalents as of March 31, 2019, $127.5 million was held outside of the United States. Following the enactment of the Tax Reform Act and the associated transition tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax. However, repatriation of cash could subject the Company to non-U.S. jurisdictional taxes on distributions. The Company maintains non-U.S. funds in its foreign operations to (1) provide adequate working capital, (2) satisfy various regulatory requirements, and (3) take advantage of business expansion opportunities as they arise. The non-U.S. jurisdictional taxes applicable to foreign earnings are not readily determinable or practicable. The Company continues to evaluate the impact of the Tax Reform Act on its election to indefinitely reinvest certain of its non-U.S. earnings. As of March 31, 2019, management believes that it has sufficient liquidity to satisfy its cash needs, including its cash needs in the United States.

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Note 11: Leases
Effective January 1, 2019, the Company adopted Topic 842 using the modified retrospective method. As such, the Company recognized operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated statements of financial condition. Prior period financial statements were not adjusted under the new standard and therefore, those amounts are not presented below. The Company elected not to apply the recognition requirements to short-term leases, not to separate non-lease components from lease components, and elected the transition provisions available for existing contracts, which allowed the Company to carryforward its historical assessments of (1) whether contracts are or contain a lease, (2) lease classification, and (3) initial direct costs.
ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets also include any advance lease payments made and are net of any lease incentives. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The majority of the Company’s leases are for corporate offices, various facilities and information technology equipment. The components of lease expense for the three months ended March 31, 2019 were as follows (in thousands):
 
Three Months Ended March 31, 2019
Operating lease costs(1)
$
4,778

Finance lease costs
 
Amortization of right-of-use assets
437

Interest on lease liabilities
174

Total lease costs
$
5,389

________________________
(1)
Operating lease expenses are included in general and administrative expenses in the Company’s consolidated statements of operations.
The following table provides supplemental consolidated balance sheet information related to leases as of March 31, 2019 (in thousands):
 
Classification
March 31,
2019
Assets
 
 
Operating lease right-of-use assets
Other assets
$
91,045

Finance lease right-of-use assets
Property and equipment, net
5,074

Total lease right-of-use assets
 
$
96,119

 
 
 
Liabilities
 
 
Operating lease liabilities
Other liabilities
$
106,010

Finance lease liabilities
Debt, net
5,904

Total lease liabilities
 
$
111,914


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Supplemental lease information is summarized below (in thousands, except rate and lease term):
 
Three Months Ended March 31, 2019
Right-of-use assets obtained in exchange for new operating lease obligations
$
109,597

Right-of-use assets obtained in exchange for new finance lease obligations

Cash paid for amounts included in the measurement of lease liabilities
 
Operating leases - operating cash flows
4,189

Finance leases - operating cash flows
174

Finance leases - financing cash flows
418

 
March 31,
2019
Weighted-average remaining lease term (in years)
 
Operating leases
8.3

Finance leases
3.7

Weighted-average discount rate
 
Operating leases(1)
5.6
%
Finance leases
4.4
%
________________________
(1)
Upon adoption of the new lease standard, discount rates used for existing operating leases were established at January 1, 2019.
Minimum future payments on noncancelable operating leases as of March 31, 2019 are summarized as follows (in thousands):
 
Finance
Leases
 
Operating
Leases
 
Total
2019(1)
$
1,356

 
$
11,917

 
$
13,273

2020
1,808

 
17,688

 
19,496

2021
1,650

 
17,787

 
19,437

2022
1,419

 
16,252

 
17,671

2023
156

 
14,558

 
14,714

Thereafter

 
60,862

 
60,862

Total undiscounted lease payments
6,389

 
139,064

 
145,453

   Less: imputed interest
(485
)
 
(33,054
)
 
(33,539
)
Lease obligations under operating leases
$
5,904

 
$
106,010

 
$
111,914

________________________
(1)
2019 amount consists of nine months data from April 1, 2019 to December 31, 2019.

As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and under the previous lease accounting standard, minimum future payments on noncancelable operating leases as of December 31, 2018 are summarized as follows (in thousands):

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Finance
Leases
 
Operating
Leases
 
Total
2019
$
2,507

 
$
16,538

 
$
19,045

2020
1,983

 
13,850

 
15,833

2021
1,844

 
13,044

 
14,888

2022
1,630

 
11,737

 
13,367

2023
204

 
9,741

 
9,945

Thereafter

 
37,997

 
37,997

Total minimal leases payments
8,168

 
$
102,907

 
$
111,075

   Less: Interest
(605
)
 
 
 
 
Present value of minimal lease payments
$
7,563

 
 
 
 

Note 12: Commitments and Contingencies
Litigation and Regulatory
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.
At March 31, 2019, there were no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
In certain legal proceedings, the Company may have recourse to insurance or third party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when additional information becomes available. The Company’s legal costs are recorded to expense as incurred. As of March 31, 2019, the Company has no material reserves for legal matters.
Purchase Commitments
In the normal course of business, the Company enters into forward flow purchase agreements and other purchase commitment agreements. As of March 31, 2019, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $2.8 billion for a purchase price of approximately $358.0 million. Most purchase commitments do not extend past one year.
Note 13: Segment and Geographic Information
The Company conducts business through several operating segments that have similar economic and other qualitative characteristics and have been aggregated in accordance with authoritative guidance into one reportable segment, portfolio purchasing and recovery. Since the Company operates in one reportable segment, all required segment information can be found in the consolidated financial statements.

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The Company has operations in the United States, Europe and other foreign countries. The following table presents the Company’s total revenues, adjusted by net allowances by geographic areas in which the Company operates (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Revenues, adjusted by net allowances(1):
 
 
 
United States
$
189,372

 
$
171,944

International
 
 
 
Europe(2)
135,276

 
130,614

Other geographies
22,429

 
24,230

 
157,705

 
154,844

Total
$
347,077

 
$
326,788

________________________
(1)
Revenues, adjusted by net allowances, are attributed to countries based on consumer location. Revenues primarily include portfolio revenues and fee-based income earned on accounts collected on behalf of others.
(2)
Based on the financial information that is used to produce the general-purpose financial statements, providing further geographic information is impracticable.
Note 14: Goodwill and Identifiable Intangible Assets
In accordance with authoritative guidance, goodwill is tested for impairment at the reporting unit level annually and in interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions.
The annual goodwill testing date for the reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st. There have been no events or circumstances during the three months ended March 31, 2019 that have required the Company to perform an interim assessment of goodwill carried at these reporting units. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. Adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.
The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The following table summarizes the activity in the Company’s goodwill balance (in thousands):
 
Total
Balance, December 31, 2018
$
868,126

Effect of foreign currency translation
14,758

Balance, March 31, 2019
$
882,884

The Company’s acquired intangible assets are summarized as follows (in thousands):
 
As of March 31, 2019
 
As of December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
68,767

 
$
(13,309
)
 
$
55,458

 
$
73,458

 
$
(17,025
)
 
$
56,433

Developed technologies
6,752

 
(5,870
)
 
882

 
7,461

 
(6,446
)
 
1,015

Trade name and other
8,079

 
(5,036
)
 
3,043

 
8,346

 
(5,213
)
 
3,133

Total intangible assets
$
83,598

 
$
(24,215
)
 
$
59,383

 
$
89,265

 
$
(28,684
)
 
$
60,581



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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in our Annual Report on Form 10-K under “Part I, Item 1A. Risk Factors,” could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.
Our Business
We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We primarily purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans.
Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific.
MCM (United States)
Through MCM we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico.
Cabot (Europe)
Through Cabot we are one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), contingent collections, trace services and litigation activities. Cabot strengthened its debt servicing offerings with the acquisition of Wescot Credit Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO services company in November 2017. Previously we controlled CCM via our majority ownership interest in an indirect holding company of CCM. In July 2018, we completed the purchase of all of the outstanding equity of CCM not owned by us (the “Cabot Transaction”). As a result, CCM became a wholly owned subsidiary of Encore.
LAAP (Latin America and Asia-Pacific)
We have non-performing loans in Colombia, Peru, Mexico and Brazil. Our subsidiary Baycorp Holdings Pty Limited (together with its subsidiaries, “Baycorp”) specializes in the management of non-performing loans in Australia and New Zealand. In addition to purchasing defaulted receivables, Baycorp offers portfolio management services to banks for non-performing loans. Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.

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To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business through MCM and strengthening and developing our Cabot business.
Government Regulation
MCM (United States)
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our U.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices.
On May 7, 2019, the Consumer Financial Protection Bureau (“CFPB”) issued a Notice of Proposed Rulemaking (“NPRM”) regarding debt collection. The NPRM proposes rules related to, among other things: disclosures by debt collectors to consumers; requirements for debt validation; use of newer technologies (text, voicemail and email) to communicate with consumers; and limits relating to telephonic communications. The industry and public have a 90-day period to comment on the proposed rules. The CFPB will then evaluate any comments and issue the final rules. It is anticipated that the final rules will be issued in late 2019 or early 2020, with an effective date one year after the final rules are issued. 
Cabot (Europe)
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our operations in Europe are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business.
Portfolio Purchasing and Recovery
MCM (United States)
In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.
We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our U.S. operations. These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the United States.
Cabot (Europe)
In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase certain secured mortgage portfolios and portfolios that are in insolvency status, in particular, individual voluntary arrangements.
We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets we have acquired. We maintain strong relationships with many of the largest financial services providers in the United Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other credit management services providers.

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Purchases and Collections
Portfolio Pricing, Supply and Demand
MCM (United States)
Industry delinquency and charge-off rates have continued to increase, creating higher volumes of charged-off accounts that are sold. In addition, issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution. Meanwhile pricing remains favorable. In addition to selling a higher volume of charged-off accounts, issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year.
We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace. We believe this favors larger participants, such as Encore, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements.
Cabot (Europe)
The U.K. market for charged-off portfolios continues to grow, despite an on-going historic low level of charge-off rates, as creditors choose to both sell more of their debt and sell at earlier stages. The near record levels of consumer indebtedness suggests that charged-off debt will increase over time and, together with recent commitments by major debt purchasers to deliver a deleveraging profile, cause us to believe that pricing pressure will soften in the future.
The Spanish debt market continues to be one of the largest in Europe with a significant amount of debt to be sold and serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans which should further increase debt purchasing opportunities in Spain.
Although pricing has been elevated, we believe that as our European businesses increase in scale and continue to improve liquidation and collection efficiencies, our margins will remain competitive. Additionally, our continuing investment in our litigation liquidation channel has enabled us to collect from consumers who have the ability to pay but have so far been unwilling to do so. This also enables us to mitigate some of the impact of elevated pricing.
Purchases by Geographic Location
The following table summarizes the geographic locations of receivable portfolios we purchased during the periods presented (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
MCM (United States)
$
174,227

 
$
179,038

Cabot (Europe)
83,640

 
87,315

Other geographies
4,468

 
10,409

Total purchases
$
262,335

 
$
276,762

During the three months ended March 31, 2019, we invested $262.3 million to acquire receivable portfolios, with face values aggregating $1.7 billion, for an average purchase price of 15.1% of face value. The amount invested in receivable portfolios decreased $14.5 million, or 5.2%, compared with the $276.8 million invested during the three months ended March 31, 2018, to acquire receivable portfolios with face values aggregating $1.8 billion, for an average purchase price of 15.4% of face value.
In the United States, capital deployment slightly decreased for the three months ended March 31, 2019, as compared to the corresponding period in the prior year. Capital deployment for the three months ended March 31, 2018 was elevated due to timing differences which shifted higher-than-expected volumes to the period from the period before.
In Europe, capital deployment for the three months ended March 31, 2019 decreased as compared to the corresponding period in the prior year. The decrease was primarily the result of a more selective purchasing process employed in conjunction with a plan to reduce European debt leverage over time.

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The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios.
Collections by Channel and Geographic Location
We utilize three channels for the collection of our receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels. The following table summarizes the total collections by collection channel and geographic area (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
MCM (United States) (1):
 
 
 
Call center and digital collections
$
185,255

 
$
161,493

Legal collections
141,036

 
132,642

Collection agencies
3,303

 
4,832

Subtotal
329,594

 
298,967

Cabot (Europe):
 
 
 
Call center and digital collections
62,665

 
82,011

Legal collections
50,658

 
31,380

Collection agencies
47,477

 
48,786

Subtotal
160,800

 
162,177

Other geographies(2):
 
 
 
Call center and digital collections
10,200

 
22,171

Legal collections
1,530

 
2,107

Collection agencies
11,729