On 30 September 2019, Pioneer Credit Limited (Pioneer, Company) announced its full year results for the period ended 30 June 2019, adopting amortised cost (new accounting methodology for determining the fair value of purchased debt portfolios after acquisition) for the first time. Pioneer also requested an extension of its trading suspension to 31 October 2019. This comes as little surprise after it had entered into a Standstill Agreement with its senior financiers on 24 September 2019, effective to 14 October 2019 (or unless extended--which is likely in our view). A Standstill Agreement effectively permits the Company to pursue its financing options without the senior financiers taking any action in relation to existing covenant breaches (such as repayment of principal or penalty interest).
Pioneer announced a net profit after tax (NPAT) of AUD4.3m, down ~76% from the prior corresponding period. Revenues were ~7% lower at AUD74.7m, while EBIT was ~54% lower at AUD13.2m (EBITDA was 17% higher at AUD63.4m, highlighting the impact of the change in accounting methodology, particularly amortisation of purchased debt portfolios). While the change in accounting standard has had a material impact on both NPAT and EBIT (a function of a change in the discount rate applied to determine the present value of purchased debt portfolios [Pioneers main earning asset]), the expected timing and receipt of forecast cash flows remains unchanged. Cash receipts were ~15% higher at ~AUD121m. Purchased debt portfolios held at amortised costs were up ~11% to ~AUD250m; we estimate gearing (the proportion of debt to earning assets) has increased to ~65%, from ~60% at 31 December 2019. The Company is limited to leverage across all of its financing facilities of 70%. Purchasing of debt portfolios is currently being funded by free cash flow, which suggests gearing shouldn’t deteriorate further unless the fair value of those earning assets noticeably deteriorates.
Pioneer's auditors highlighted the uncertainty of the Company operating as a going concern. This stems from the reclassification of Pioneer's borrowing from non-current to current following an announcement from one of its senior financiers that it would not renew its funding from March 2020 (that is, the Company has net-current liabilities). The uncertainty of Pioneer operating as a going concern primarily relates to the risk that Pioneer is unable to satisfy its obligations when due (March 2020) or earlier, if the senior financiers do not extend the Standstill Agreement. At this stage, we believe this is unlikely. We remain of the view that a sale of the business is the more likely transition from the trading suspension.
Pioneer also provided a brief update on its financing options, which includes a potential change of control (sale of the business) or establishment of alternative financing. According to the Company, “this process, while still in its early stages, has led to significant levels of interest in evaluating a potential transaction with the Company.” The Company expects to provide an update of its progress as part of its next communication to stakeholders. We note that subsequent to 30 June 2019, the Company has decided to sell its consumer loan portfolio (carrying value of AUD8.2m). We believe this announcement makes strategic sense given the non-strategic contributions of the consumer lending business.
In summary, developments thus far are evolving largely as we expect. The Company continues to trade in the ordinary course of business. Purchasing of debt under existing agreements between Pioneer and commercial banks (as sellers of distressed debt portfolios) is currently being funded by free cash flow. The Company did not provide specific guidance for FY20, although this is not a surprise given the fluidity of current developments.
We will provide an update to noteholders when further information is provided by the Company.