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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________________________________
FORM 10-Q
(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020 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)
Delaware48-1090909
(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, including zip code)
(877) 445 - 4581
(Registrant’s telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)
_______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par Value Per ShareECPGThe NASDAQ Stock Market LLC
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      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      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 filerAccelerated filerNon-accelerated filerSmaller 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 Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding at May 4, 2020
Common Stock, $0.01 par value31,234,420 shares



Table of Contents
ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
 
 Page



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,
2020
December 31,
2019
Assets
Cash and cash equivalents$188,199  $192,335  
Investment in receivable portfolios, net3,166,018  3,283,984  
Deferred court costs, net  100,172  
Property and equipment, net119,417  120,051  
Other assets302,019  329,223  
Goodwill839,301  884,185  
Total assets
$4,614,954  $4,909,950  
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities$168,481  $223,911  
Borrowings3,404,427  3,513,197  
Other liabilities136,235  147,436  
Total liabilities
3,709,143  3,884,544  
Commitments and Contingencies (Note 11)
Equity:
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding
    
Common stock, $0.01 par value, 75,000 shares authorized, 31,234 and 31,097 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
312  311  
Additional paid-in capital222,403  222,590  
Accumulated earnings833,366  888,058  
Accumulated other comprehensive loss(153,355) (88,766) 
Total Encore Capital Group, Inc. stockholders’ equity902,726  1,022,193  
Noncontrolling interest3,085  3,213  
Total equity
905,811  1,025,406  
Total liabilities and equity
$4,614,954  $4,909,950  
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,
2020
December 31,
2019
Assets
Cash and cash equivalents$90  $34  
Investment in receivable portfolios, net478,613  539,596  
Other assets4,645  4,759  
Liabilities
Borrowings$435,099  $464,092  
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,
 20202019
Revenues
Revenue from receivable portfolios$357,365  $311,158  
Changes in expected current and future recoveries(98,661)   
Servicing revenue28,680  34,023  
Other revenues1,697  529  
Total revenues289,081  345,710  
Allowance reversals on receivable portfolios, net1,367  
Total revenues, adjusted by net allowances347,077  
Operating expenses
Salaries and employee benefits93,098  91,834  
Cost of legal collections66,279  49,027  
Other operating expenses27,164  29,614  
Collection agency commissions13,176  16,002  
General and administrative expenses31,877  39,547  
Depreciation and amortization10,285  9,995  
Total operating expenses241,879  236,019  
Income from operations  47,202  111,058  
Other (expense) income
Interest expense(54,662) (54,967) 
Other income (expense)1,439  (2,976) 
Total other expense(53,223) (57,943) 
(Loss) income before income taxes (6,021) 53,115  
Provision for income taxes  (4,558) (3,673) 
Net (loss) income (10,579) 49,442  
Net loss (income) attributable to noncontrolling interest 125  (188) 
Net (loss) income attributable to Encore Capital Group, Inc. stockholders $(10,454) $49,254  
(Loss) earnings per share attributable to Encore Capital Group, Inc.:
Basic$(0.33) $1.58  
Diluted$(0.33) $1.57  
Weighted average shares outstanding:
Basic31,308  31,201  
Diluted31,308  31,359  
See accompanying notes to consolidated financial statements
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ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive (Loss) Income
(Unaudited, In Thousands)
 Three Months Ended March 31,
 20202019
Net (loss) income $(10,579) $49,442  
Other comprehensive (loss) income, net of tax:
Change in unrealized gains/losses on derivative instruments:
Unrealized loss on derivative instruments  (5,051) (2,202) 
Income tax effect1,497  172  
Unrealized loss on derivative instruments, net of tax  (3,554) (2,030) 
Change in foreign currency translation:
Unrealized (loss) gain on foreign currency translation (61,038) 7,580  
Other comprehensive (loss) income, net of tax (64,592) 5,550  
Comprehensive (loss) income (75,171) 54,992  
Comprehensive loss (income) attributable to noncontrolling interest:
Net loss (income) attributable to noncontrolling interest 125  (188) 
Unrealized loss (gain) on foreign currency translation 3  (427) 
Comprehensive loss (income) attributable to noncontrolling interest 128  (615) 
Comprehensive (loss) income attributable to Encore Capital Group, Inc. stockholders $(75,043) $54,377  
See accompanying notes to consolidated financial statements
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ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(Unaudited, In Thousands)
Three Months Ended March 31, 2020
Common StockAdditional
Paid-In
Capital
Accumulated
Earnings
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
Equity
SharesPar
Balance as of December 31, 201931,097  $311  $222,590  $888,058  $(88,766) $3,213  $1,025,406  
Cumulative adjustment—  —  —  (44,238) —  —  (44,238) 
Balance as of January 1, 202031,097  311  222,590  843,820  (88,766) 3,213  981,168  
Net loss—  —  —  (10,454) —  (125) (10,579) 
Other comprehensive loss, net of tax—  —  —  —  (64,589) (3) (64,592) 
Issuance of share-based awards, net of shares withheld for employee taxes137  1  (4,714) —  —  —  (4,713) 
Stock-based compensation—  —  4,527  —  —  —  4,527  
Balance as of March 31, 202031,234  $312  $222,403  $833,366  $(153,355) $3,085  $905,811  

Three Months Ended March 31, 2019
 Common StockAdditional
Paid-In
Capital
Accumulated
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interest
Total
Equity
SharesPar
Balance as of December 31, 201830,884  $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 taxes83  1  (1,950) —  —  —  (1,949) 
Stock-based compensation—  —  1,826  —  —  —  1,826  
Balance as of March 31, 201930,967  $310  $208,374  $769,443  $(105,864) $2,294  $874,557  
See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 Three Months Ended March 31,
 20202019
Operating activities:
Net (loss) income $(10,579) $49,442  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization10,285  9,995  
Other non-cash interest expense, net5,909  6,629  
Stock-based compensation expense4,527  1,826  
Deferred income taxes(12,030) 19,682  
Changes in expected current and future recoveries98,661    
Allowance reversals on receivable portfolios, net    (1,367) 
Other, net  2,161  4,081  
Changes in operating assets and liabilities
Deferred court costs and other assets3,377  18,725  
Prepaid income tax and income taxes payable14,970  (30,247) 
Accounts payable, accrued liabilities and other liabilities(46,476) (67,775) 
Net cash provided by operating activities  70,805  10,991  
Investing activities:
Purchases of receivable portfolios, net of put-backs(209,045) (258,635) 
Collections applied to investment in receivable portfolios, net169,914  202,695  
Purchases of property and equipment(7,538) (10,227) 
Other, net3,414  (3,347) 
Net cash used in investing activities  (43,255) (69,514) 
Financing activities:
Proceeds from credit facilities171,880  196,263  
Repayment of credit facilities(167,221) (119,854) 
Repayment of senior secured notes(16,250)   
Other, net(10,171) (4,862) 
Net cash (used in) provided by financing activities (21,762) 71,547  
Net increase in cash and cash equivalents  5,788  13,024  
Effect of exchange rate changes on cash and cash equivalents(9,924) (3,346) 
Cash and cash equivalents, beginning of period192,335  157,418  
Cash and cash equivalents, end of period$188,199  $167,096  
Supplemental disclosure of cash information:
Cash paid for interest$60,495  $62,135  
Cash paid for taxes, net of refunds766  15,003  

See accompanying notes to consolidated financial statements
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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.
The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as “LAAP.” In August 2019, the Company completed the sale of Baycorp, which represented the Company’s investments and operations in Australia and New Zealand and was a component of LAAP.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 outbreak and resulting containment measures implemented by governments around the world, as well as increased business uncertainty, are having an adverse impact on the Company’s ability to collect and are expected to delay a portion of its near-term expected cash collections on purchased receivable portfolios. The resulting impact on expected recoveries has impacted our financial results. We may also incur increased costs or other adverse changes to our business, but such potential impacts are unknown at this time.
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, 2019. 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. The inputs into the judgments and estimates consider the economic implications of COVID-19 on the Company’s critical and significant accounting estimates. 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.
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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 and are reclassified to earnings upon the substantial sale or liquidation of investments in foreign operations.
Reclassifications
Certain immaterial reclassifications have been made to the consolidated financial statements to conform to the current year’s presentation.
Recently Adopted Accounting Pronouncement
On January 1, 2020, the Company adopted the new accounting standard for Financial Instruments - Credit Losses (“CECL”). CECL introduces a new impairment approach for credit loss recognition based on current expected lifetime losses rather than incurred losses. CECL applies to all financial assets carried at amortized costs, including the Company’s investment in receivable portfolios, which are defined as purchased credit deteriorated (“PCD”) financial assets under CECL. The adoption of CECL represents a significant change from the previous U.S. GAAP guidance relating to purchased credit impaired assets and resulted in changes to the Company’s accounting for its investment in receivable portfolios and the related income from the receivable portfolios.
As part of the adoption of CECL, the Company changed its accounting methodology for its court costs spent in its legal collection channel effective January 1, 2020. Previously, the Company capitalized its upfront court costs spent in its consolidated financial statements (“Deferred Court Costs”) and provided a reserve for those costs that it believed would ultimately be uncollectible. Effective January 1, 2020, the Company expenses all of its court costs as incurred. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value. Upon transition, an adjustment was made to retained earnings to reflect the net change from an undiscounted to discounted value prior to writing-off uncollectible receivables and establishing a balance for discounted value of future recoveries of amounts expected to be collected.
The Company has not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The following table summarizes the cumulative effects of adopting the CECL guidance on the Company’s consolidated statements of financial condition at January 1, 2020 (in thousands):
Balance as of December 31, 2019AdjustmentOpening Balance as of January 1, 2020
Assets
Investment in receivable portfolios, net$3,283,984  $44,166  $3,328,150  
Deferred court costs, net100,172  (100,172)   
Liabilities
Other liabilities (for deferred tax liabilities)147,436  (11,768) 135,668  
Equity
Accumulated earnings888,058  (44,238) 843,820  
Recent Accounting Pronouncements Not Yet Effective
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU is effective as of March 12, 2020 through December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional
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guidance on an ongoing basis. The ASU is currently not expected to have a material impact on our consolidated financial statements.
With the exception of the updated standard discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2020, 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.
Accounting Policy Update
As a result of the adoption of CECL, the Company revised its following accounting policies effective January 1, 2020:
Investment in Receivable Portfolios
The Company purchases portfolios of loans that have experienced significant deterioration of credit quality since origination from banks and other financial institutions. These financial assets are defined as PCD assets under CECL. Under the PCD accounting model, the purchased assets are grossed-up to their face value with an offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables immediately after purchasing the portfolio. The Company then records a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which ultimately equals the amount paid for a portfolio purchase and presented as “Investment in receivable portfolios, net” in the Company’s consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. The amount of the negative allowance (i.e., investment in receivable portfolios) will not exceed the total amortized cost basis of the loans written-off.
Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include 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 location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.
Revenue is recognized for each static pool over the economic life of the pool. The Company continues to evaluate the reasonable economic life of a pool in each reporting period. Revenue primarily includes two components: (1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries.
The Company elected not to maintain its previously formed pool groups with amortized costs at transition. Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to the transition. The Company did not establish a negative allowance from ZBA pools as the Company elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of its legacy pools. All subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in the Company’s consolidated statements of operations. See “Note 5: Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios.
Deferred Court Costs
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. Effective January 1, 2020, the Company expenses all of its court costs as incurred and no longer capitalizes such costs as Deferred Court Costs. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value.
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Note 2: (Loss) Earnings Per Share
Basic (loss) earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share is 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. In computing the diluted net loss per share for the three months ended March 31, 2020, dilutive potential common shares are excluded from the diluted loss per share calculation because of their anti-dilutive effect.
A reconciliation of shares used in calculating (loss) earnings per basic and diluted shares follows (in thousands, except per share amounts):
 Three Months Ended March 31,
 20202019
Net (loss) income attributable to Encore Capital Group, Inc. stockholders$(10,454) $49,254  
Total weighted-average basic shares outstanding31,308  31,201  
Dilutive effect of stock-based awards  158  
Total weighted-average dilutive shares outstanding31,308  31,359  
Basic (loss) earnings per share$(0.33) $1.58  
Diluted (loss) earnings per share$(0.33) $1.57  
Anti-dilutive employee stock options outstanding were approximately 13,000 and 217,000 for the three months ended March 31, 2020 and 2019, respectively.
Note 3: Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 Fair Value Measurements as of March 31, 2020
 Level 1Level 2Level 3Total
Assets
Interest rate cap contracts$  $2,150  $  $2,150  
Liabilities
Foreign currency exchange contracts  (2,177)   (2,177) 
Interest rate swap agreements  (14,735)   (14,735) 
Contingent consideration    (27) (27) 

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 Fair Value Measurements as of December 31, 2019
 Level 1Level 2Level 3Total
Assets
Foreign currency exchange contracts$  $1,473  $  $1,473  
Interest rate cap contracts  2,460    2,460  
Liabilities
Interest rate swap agreements  (9,116)   (9,116) 
Contingent consideration    (66) (66) 
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, 2020 and year ended December 31, 2019 (in thousands):
Amount
Balance as of December 31, 2018$6,198  
Change in fair value of contingent consideration(2,300) 
Payment of contingent consideration(3,686) 
Effect of foreign currency translation(146) 
Balance as of December 31, 201966  
Payment of contingent consideration(35) 
Effect of foreign currency translation(4) 
Balance as of March 31, 2020$27  
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 3 measurements. The fair value estimate of the assets held for sale was approximately $42.9 million and $46.7 million as of March 31, 2020 and December 31, 2019, respectively.
Financial Instruments Not Required To Be Carried At Fair Value
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.




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The carrying amounts in the following table are included in the consolidated statements of financial condition as of March 31, 2020 and December 31, 2019 (in thousands):
 March 31, 2020December 31, 2019
 Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Financial Assets
Investment in receivable portfolios, net$3,166,018  $3,547,965  $3,283,984  $3,464,050  
Deferred court costs    100,172  100,172  
Financial Liabilities
Encore convertible notes and exchangeable notes(1)
645,591  567,691  642,547  693,708  
Cabot senior secured notes(2)
1,077,548  996,060  1,127,435  1,170,945  
_______________________
(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.
(2)Carrying amount represents historical cost, adjusted for any related debt discount or debt premium.
Investment in Receivable Portfolios:
The fair value of investment in receivable portfolios is measured 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. 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.
Deferred Court Costs:
Effective January 1, 2020, the Company no longer carries Deferred Court Costs as a result of its change in accounting policy. The fair value estimate for Deferred Court Costs as of December 31, 2019 involved Level 3 inputs as there was little observable market data available and management was required to use significant judgment in its estimates.
Borrowings:
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. The Company’s borrowings also include finance lease liabilities for which the carrying value approximates fair value.
Encore’s convertible notes and exchangeable notes and Cabot’s senior secured notes are carried at historical cost, adjusted for the debt discount. The fair value estimate for these convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs.
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. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.
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The following table summarizes the fair value of derivative instruments as included in the Company’s consolidated statements of financial condition (in thousands):
 March 31, 2020December 31, 2019
Balance Sheet
Location
Fair ValueBalance Sheet
Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate cap contractsOther assets$2,150  Other assets$2,460  
Foreign currency exchange contractsOther liabilities(134) Other assets443  
Interest rate swap agreementsOther liabilities(14,735) Other liabilities(9,116) 
Derivatives not designated as hedging instruments:
Foreign currency exchange contractsOther liabilities(2,043) Other assets1,030  
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.
Certain of 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, 2020, the total notional amount of the forward contracts that were designated as cash flow hedging instruments was $6.3 million. The Company estimates that approximately $0.1 million of net derivative loss 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, 2020 and 2019.
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, 2020, there were four interest rate swap agreements outstanding with a total notional amount of $327.9 million.
Previously, the Company held two interest rate cap contracts that matured in 2021 (the “2018 Caps”) which hedged the risk of GBP-LIBOR interest rate fluctuations for interest payments of Cabot Securitisation’s senior facility agreement. As part of the amended and restated senior facility agreement as described in “Note 8: Borrowings”, the Company settled the 2018 Caps and ceased the hedge relationship which resulted in the reclassification of the associated other comprehensive loss balance to interest expense for approximately $2.5 million during the three months ended March 31, 2020.
As of March 31, 2020, the Company held two interest rate cap contracts with a notional amount of approximately $876.4 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR for the Cabot 2024 Floating Rate Notes (“2019 Cap”) has a notional amount of €400.0 million (approximately $435.1 million) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) for the Cabot Securitisation UK Ltd senior facility agreement (“2020 Cap”) has a notional amount of £350.0 million (approximately $441.3 million) and matures in 2023. The 2019 Cap is structured as a series of European call options (“Caplets”) such that if exercised, the Company will receive a payment equal to 3-months EURIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. The 2020 Cap is also structured as a series of Caplets such that if exercised, the Company will receive a payment equal to SONIA on a notional amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash flows of the interest payments to the extent SONIA or EURIBOR exceeds the strike price of the Caplets. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments.
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The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated statements of operations (in thousands):
Derivatives Designated as Hedging InstrumentsGain (Loss)
Recognized in OCI
Location of Gain (Loss) Reclassified from
OCI into Income (Loss)
Gain (Loss) Reclassified from OCI into Income (Loss)
Three Months Ended
March 31,
Three Months Ended
March 31,
2020201920202019
Foreign currency exchange contracts$(389) $935  Salaries and employee benefits$127  $(95) 
Foreign currency exchange contracts(45) (78) General and administrative expenses17  (84) 
Interest rate swap agreements(6,707) (2,086) Interest expense(1,088) (420) 
Interest rate cap contracts(1,396) (1,572) Interest expense(2,542)   
Derivatives Not Designated as Hedging Instruments
The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge 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. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value.
The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments in the Company’s consolidated statements of operations (in thousands):
Amount of Gain Recognized in Income (Loss)
Three Months Ended
March 31,
Derivatives Not Designated as Hedging InstrumentsLocation of Gain Recognized in Income (Loss) on Derivative20202019
Foreign currency exchange contractsOther income (expense) $1,943  $  

Note 5: Investment in Receivable Portfolios, Net
As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies”, effective January 1, 2020, the Company accounts for its investment in receivable portfolios as PCD assets under CECL and changed its accounting policy for reimbursable court costs. As a result, the Company wrote-off the previous Deferred Court Costs balance that represented an undiscounted value of recoverable historic spend as a result of a loss-rate methodology, and established a discounted value of expected future recoveries of these reimbursable court costs, which is included in the beginning balance of the investment in receivable portfolios.
The table below illustrates the Company’s transition approach for its investment in receivable portfolios as of January 1, 2020 (in thousands):
Amount
Investment in receivable portfolios prior to transition$3,283,984  
Initial transitioned deferred court costs44,166  
3,328,150  
Allowance for credit losses79,028,043  
Amortized cost82,356,193  
Noncredit discount132,533,142  
Face value214,889,335  
Write-off of amortized cost(82,356,193) 
Write-off of noncredit discount(132,533,142) 
Negative allowance3,328,150  
Initial negative allowance from transition$3,328,150  
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The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the three months ended March 31, 2020 (in thousands):
Three Months Ended March 31, 2020