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Welcome to International Personal Finance's Q3 2020 Trading Update Call for Investors. Today, your host is Gerard Ryan, Chief Executive Officer; and he is also joined by Chief Financial Officer Justin Lockwood. Today's conference is being recorded. I will now hand the call over to Gerard. Please go ahead.
Thank you, Marian. Good morning, everybody, and welcome to our Q3 trading update call. As Marian said, I'm joined this morning by Justin Lockwood, our CFO. Now hopefully, you've had a chance to read our Q3 trading update, which we published earlier this morning. In addition, we also issued a second statement explaining the launch of an exchange offer for our 2021 Eurobond and a consent solicitation process for our sterling and Swedish krona bonds. In the call this morning, I'll cover our improving trading performance and our return to profitability, and I'll also provide some color around the refinancing process. As usual, we will have plenty of time at the end for Q&A. Let me start with the overview of Q3 and our return to profitability. COVID-19 has thrown a lot of very serious challenges at our business during the last 8 months. But I have to say I'm so happy with the dedication of our colleagues and agents and the energy and enthusiasm they have shown throughout this very difficult period. Our 4-phase strategy which we explained at the half year is working effectively, and our focus on protecting our people and rightsizing the business has helped us to quickly return to profitability. And it's also worth noting that we were profitable in the quarter on both a pre- and post-exceptional basis. This is a very positive outcome and demonstrates the resilience of our business model even in the most difficult of times. If I move on now to our operational effectiveness. All of our key performance metrics continued to improve over the course of quarter 3, mostly I think because of the swift actions we took at the start of the pandemic to protect our people and the quality of our portfolio, and also the work we did to significantly reduce our structural cost base during the quarter. Our collections effectiveness improved month-on-month as government lockdown restrictions were eased from June onwards and our agents returned to visiting customers. For the quarter as a whole, collections effectiveness was 95% of our pre-COVID plan. And as we move to a more normalized trading footing, it was clear to us that providing a safe and supportive environment for our team so that they could serve their customers well was absolutely key to this strong performance. This positive momentum in collections effectiveness then allowed us to further relax our credit settings across the group, albeit somewhat cautiously, and this resulted in a 55% step-up in credit issued in quarter 3 over quarter 2, and this represented a contraction of 49% year-on-year for the quarter. If we look at our individual business divisions, we delivered significant improvements in European home credit in quarter 3 compared to quarter 2, and the relatively early resumption of our agent service allowed us to ease credit settings and issue more credit to our best-quality customers in this region. In Mexico home credit, good collections enabled us to grow volumes in quarter 3 compared to the very uncertain quarter 2. And in September, we increased credit issued to 55% of pre-COVID expectations. Credit issued in IPF Digital was at a similar level to the second quarter, obviously impacted by our decision to cease sales in Finland and collect out the portfolio in that particular market. Excluding Finland, we increased credit issued to 54% of pre-COVID expectations in September, supported by robust collections effectiveness. For all of our divisions, we expect to further increase credit issued in the coming months, rebuilding our receivables portfolio whilst maintaining strong credit quality. As we reported in our 2020 half year statement, the application of IFRS 9 to COVID-related business impacts had a significant adverse impact on our impairment charge in the first half. At the end of quarter 3, annualized impairment as a percentage of revenue was 38.1%, so broadly stable with the 2020 half year results. This comprised an increase in European home credit, partially offset by pleasing improvements in both Mexico home credit and IPF Digital. In European home credit, the one-off impact of the proposed extension of the Hungarian debt repayment moratorium and the timing of debt sales offset an underlying improvement in the impairment charge. And just to give you a little bit of color on Hungary, last month, Viktor Orbán, the Hungarian Prime Minister, announced his intention to extend Hungary's temporary debt repayment moratorium for certain customer groups until the 30th of June '21. Now you'll recall it was originally due to expire at the end of this year. Details including eligibility criteria have yet to be announced, although it is clear that the moratorium is only available in respect of loans outstanding before the 18th of March 2020 and, therefore, does not impact any new lending. As noted in the statement today, we have recorded an incremental impairment charge in September for European home credit to account for this extension. Now looking ahead, and I'd like to emphasize here that we've not seen any impact to date, we are prudently assuming that there will be a modest reduction in collections effectiveness during the winter period. This is based on our expectation of the potential recessionary impact of COVID on our customers' income and likely higher levels of flu and COVID infections, which may mean that agents and customers cannot meet as regularly as they would otherwise do. In the U.K., we're all aware that the second wave of COVID is beginning to impact how we live and work. And I have to say, it's no exception in the markets where we serve our customers. Although governments in each of the countries in which we trade are assiduously avoiding national knockdowns and instead are opting for local restrictions, we have undertaken a thorough review of the successful actions we took to tackle the first wave of the pandemic so that we are as prepared as we can be for wave 2. We sourced personal protective equipment for our colleagues and agents to use when visiting customers. Remote working remains the norm for the majority of our colleges in home credit and digital, and a range of remote alternative repayment options, all tried and tested in wave 1, are available to customers if agents are unable to visit them. So moving on now from operational matters. I'll turn to the balance sheet, cash flow and funding, all of which continue to be key focus areas for us. As you know, we came into the pandemic period with a very strong balance sheet, and I'm pleased to report that it continues to be very robust, with the equity to receivables ratio strengthening to 56% at the 30th of September from 51% at the half year. So obviously, significantly higher than our target ratio of 40%. We generated net cash flow of GBP 143 million during the third quarter, and this was a combination of our robust collections performance, the effective management of credit issued, the impact of the cost reductions that we've already implemented and the GBP 45 million tax refund in Poland. Now as a result, our nonoperational cash balances and headroom on current debt facilities totaled GBP 348 million at the end of the quarter. When we announced our half year results, we explained that the impact of COVID-19 was likely to temporarily affect one of our covenant tests in the short term, and we opened discussions with our banks on appropriate covenant amendments. This process is progressing well, and I'm pleased to report that we have received credit committee approvals in respect of GBP 123 million of bank facilities. And the final area I want to cover off here is the exchange offer detailed in today's announcement. Our bond exchange offer invites holders of our Eurobond, which is due to mature in April of next year, to exchange their bonds for a combination of a new Eurobond at 80% and cash repayment of 20%, both at par. We have also launched a consent solicitation process for covenant amendments to be made in respect of our sterling and Swedish krona bonds. If you're looking for further information, full details of the exchange offer and the consent solicitation process are available on our website. So that's www.ipfin.co.uk, so W-W-W dot I-P-F-I-N dot co dot U-K. A successful bond exchange offer and the approved levels of bank facilities secured to date will provide us with a flexible financial structure to enable us to rebuild the portfolio by continuing to promote financial inclusion of our underbanked and underserved customers fulfilling their credit needs responsibly. This in turn will deliver long-term growth and value to all of our stakeholders, as already evidenced by our rapid return to profitability in quarter 3. So bringing this all together before we open for questions. The actions we took at the start of the pandemic period, the dedication of our teams and the implementation of our phased strategy have helped us to make a rapid return to profitability in the quarter. Operationally, our trading performance continued to improve. We delivered better collections effectiveness, higher levels of sales, albeit we're still being cautious in respect of our appetite for growth, and underlying impairment is improving. We expect a modest reduction in collections effectiveness over the winter period, but we will continue to increase credit issuance to rebuild our receivables portfolio whilst managing overall credit risk. Clearly, we are very focused on the refinancing process. And today, you've heard that we have secured GBP 123 million of bank facilities as a result of our covenant discussion, an exchange offer for our main Eurobond is now live, and a consent solicitation process is underway for our other bonds. And just finally, COVID-19 has presented a number of very significant challenges, but it's important to view these in the context of the robustness of our business model and the financial strength of the group. We're the leading provider of home credit and have developed a profitable digital consumer lending business. We have served and continue to serve millions of customers with credit in a very responsible way and credit that is often not available from other providers. We offer products that our customers like and that suit their lifestyles. And I believe that as we move beyond the pandemic, there will be strong demand in the markets that we serve and that the temporary rate caps and moratoria will be removed in due course. Clearly, we have a very strong balance sheet, and our business models are proving resilient in this and other difficult periods. The bond exchange offer and the consent solicitation process launched today will provide the foundation on which we will continue our return to growth to serve both our customers and our investors. Now that completes the briefing for the quarter. And I'd like to hand it back to Marian to open it up for questions, and Justin and I will be happy to answer any of those for you. So over to you, Marian.
[Operator Instructions] We'll take the first question from Stuart Duncan from Peel Hunt.
Can I just follow up on the point you made about Hungary, Gerard? There's clearly a number of other measures introduced to customers in the interim stage in different countries to try and protect customers from the impact of COVID. Are there any signs that any of the other countries are thinking about extending the measures they introduced?
Sure, Stuart. Well, Hungary is the only one where we've seen any action. And clearly, that's sent Viktor Orbán in [ south ], and those around him are now trying to put together the criteria for that. Obviously, it's expected to be much more restrictive than the [ free flow word ] the first time around. So that's fine by us. As regards to the other countries, from time to time, we hear mutterings, but it tends to be from opposition politicians, but nothing really that indicates that any of the other COVID-related regulatory restrictions that were put in place will be extended. So the short answer is no, nothing else to report.
Can I just follow up -- actually, this is probably a question for Justin. You also referred to the GBP 36 million of timing -- or temporary timing differences in the impairment charge in the first half. Does the change in Hungary impact on the reversal of that over the next 6 and 12 months?
Yes. So the incremental impairment charge that has been booked in September has been on the same basis as the accounting that we adopted at the half year. So that increase in charge comprises about -- [ it's 75% ] being a discount and impacting the balance sheet and expected credit loss impact. And the discounting impact, the benefit of the discounting impact will flow back in the second half of 2021 and a little bit into the first half of 2022.
Gary Greenwood from Shore Capital.
I just had one question. Obviously, it's good to see that you've moved back into profitability in Q3. Just wondering if you thought you could maintain that during Q4 given your comments around collections effectiveness being slightly worse over the winter months.
Yes, Gary, it's Justin. So I'm not going to make a profit forecast at this stage because much will depend on the impact that COVID-19 has on our operational performance in the fourth quarter and particularly on collections. And as we said in the statement, we do anticipate that in the winter months, we will see a modest reduction in collections effectiveness, and that would be consistent with lower -- slightly lower levels of net revenue generation. So I think the short answer is it will depend on the operational performance in the quarter. And clearly, there's a lot of uncertainty around that.
But there are no indications at this point in terms of the momentum in the business that would cause us to think we'll go into reverse, let's put it that way.
Absolutely.
We'll now take the next question from Jérôme Legras from Axiom Al.
Just a quick question on the new bonds that will be issued. Can you give us any indication on the terms and if they are expected to be issued around par value and to be trading around par? Or do you plan to have a discount on the coupons? Or anything you could say about the new notes?
Yes. So we will monitor. So we've appointed bookrunners. And now that we've made the announcement publicly, they will be in discussions with existing bondholders. And that's obviously a process of discovery, as you know. Clearly, we're trying to be fair to all parties concerned, which is why we are doing at par for the existing bondholders. But it's over the coming couple of weeks that we would expect the process of discovery through those discussions to inform us in terms of the price and the tenor.
So when we -- well, we'd expect the pricing details to be firmed up in around about 7 days' time. So by around about the 21st of the month.
Just to follow on from that. We've also been asked by somebody earlier today why we're doing 20% cash and 80% into the new bond. And I think the answer is fairly straightforward in that, clearly, the business is a bit smaller there than we would have anticipated at this point or down to [ accruement ]. But as a result of our good work on our expense side, very effective collections and being cautious on credit, clearly, we've built up a lot of cash, and that sits on the balance sheet earning 0. So economically, it makes sense for us to use some of that cash to pay down some of the existing bond rather than just refinance the whole thing.
In the statement, we referred to having nonoperational cash balances and headroom on current debt facilities of GBP 348 million. The cash element of that, which we could use today to pay down debt is GBP 172 million. So it's a very substantial amount of cash up on the balance sheet at the end of December.
[Operator Instructions] We'll now take our next question from Otto Dichtl from Stifel.
Yes. So a follow-on also on the bond exchange. Would you say -- is there a minimum amount that you need to accept the exchange offer for this to all go through? And separately, I mean, the sterling and Swedish crown consent solicitation, I mean, are they -- they're basically crucial to this whole transaction to go through as well? Or could you go even if either of those doesn't go through?
Otto, I'm afraid it's actually extremely difficult to hear. You were coming in and out. So I think what you've asked is, is there a minimum amount that we would want in the exchange offer, but I didn't quite catch the second part of the question.
Right. Sorry. The second part was if the sterling and Swedish crown consent solicitations are crucial as well to the whole bond transaction to go through. Or if in either case, if the content doesn't go through, if that derails the whole transaction.
So in terms of the transactions, whilst they are an independent process, we are looking for a positive response in respect of the SEK bond and the GBP bond alongside the [ voting ] on the euro as well.
And on the exchange, so you'll find the details on the website. We'll hold a meeting for the existing bondholders, and a quorum for that meeting is 75% of bondholders. And then to agree to the various things that need agreeing, we need 75% of those to approve. In the event that we didn't meet the quorum of 75% on that press meeting, there would be another meeting that would be held. And for that, the quorum, I believe, would be 25%. That's how the course is. But all of those details are on the website at www.ipfin.co.uk.
Excuse me, if I'm still on. But the question was really -- I mean is there a minimum amount that you require to exchange? I mean let's say, if you only get 50% of people to accept, can you still go ahead? Or what happens if you don't...
Yes, so clearly, we -- because of the effectiveness, what I mentioned earlier, minimizing costs, being careful on issuing and effective collections, we do sit on a lot of cash and also hedging on our bank facilities. So we could significantly reduce the refinancing amount. However, we need to be mindful that for participants to be interested in the new bond, then there's a certain amount of liquidity that would be required in the market, so to be a market-size transaction. So let's just say that that's GBP 250 million plus or minus. I think that's what the market would expect so the people will feel comfortable about trading in the bond afterwards.
There are no further questions in the queue at this time.
Okay. Thank you, Marian. Well, thank you, everybody, for joining the call this morning. Clearly, a lot of information out there now, and we're getting on with the process of the refinancing. Justin and I are available if any investors would like to talk to us directly as always. But look, we're very happy with the quarter. Operationally, it's been a very good quarter for us. Good to see the return to profitability and the quality of our portfolio as well as the strength of the balance sheet. Now our focus is on just the execution of the refinancing and rebuilding the portfolio. So with that, thank you very much, Marian, and thank you, everybody, for joining.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.