Encore Capital Group (ECPG) Q3 2019 Earnings Call Transcript

Encore Capital Group (ECPG -1.95%)
Q3 2019 Earnings Call
Nov 06, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standby. And welcome to Encore Capital Group's Q3 2019 earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

[Operator instructions] I would now like to turn the conference over to your host, Mr. Bruce Thomas. Please go ahead.

Bruce Thomas -- Vice President of Investor Relations

Thank you, operator. Good afternoon and welcome to Encore Capital Group's third-quarter 2019 earnings call. With me on the call today are Ashish Masih, our president and chief executive officer; Jonathan Clark, executive vice president and chief financial officer; and by phone, Ken Stannard, the CEO of Cabot Credit Management. Ashish and John will make prepared remarks today and then we will be happy to take your questions.

Unless otherwise noted, comparisons made on this conference call will be between the third quarter of 2019 and the third quarter of 2018. In addition, today's discussion will include forward-looking statements subject to risks and uncertainties. Actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties.

During this call, we will use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on Form 8-K earlier today. As a reminder, this conference call will also be made available for replay on the investors section of our website, where we will also post our prepared remarks following the conclusion of this call.

With that, let me turn the call over to Ashish Masih, our president and chief executive officer.

Ashish Masih -- President and Chief Executive Officer

Thanks, Bruce, and good afternoon, everyone. Thank you for joining our earnings call. Today Encore announced financial results for the third-quarter of 2019. I'm pleased to report that Q3 was an outstanding quarter for Encore.

We have again achieved record results across a number of key financial measures and our business is delivering its strongest performance in years. We continue to make solid progress on key strategic priorities that are contributing to our success. I will provide some background on these priorities today, and an update on our accomplishments but first, let me provide a few highlights on the third quarter. Global collections from our debt purchasing business were $499 million, up 2% in constant currency.

Global revenues were a record $356 million in Q3, and were up 6% as reported and up 8% in constant currency. Within that total, US revenues grew 18% to a record $211 million. At the end of the quarter, our worldwide ERC was $7.3 billion, up 4% in constant currency. Encore's GAAP net income was up 88% to $39 million or $1.23 per share.

Adjusted income in Q3 was up 45% to a record $52 million or $1.64 per share. This strong financial performance is the result of our steady progress on three strategic priorities, which are strengthening our business and creating shareholder value. First, we have taken steps to strengthen our balance sheet while continuing to deliver strong financial results. Second, we have sharpened our focus on the US and UK markets where we have the highest risk-adjusted returns.

Third, we continue to innovate to enhance our competitive advantages. Let's now take a closer look at these priorities. Strengthening our balance sheet continues to be the key priority for Encore, through disciplined capital deployment and improved operational performance, we have continued to grow earnings and increased ERC while reducing leverage. We have reduced our debt to equity ratio over the last two years from 5.9 times to 3.7 times.

We have also reduced our ratio of net debt to adjusted EBITDA, a measure common in the debt purchasing industry in the US and in Europe. Since the first quarter of 2018, we have reduced this ratio from 3.2 times to 2.7 times, resulting in a level that is among the lowest in the industry. Although a portion of our improvement this year was driven by Cabot's efforts to reduce the leverage, Encore's delevering began almost two years ago, when a stronger operating performance and refocused capital deployment began to drive higher levels of efficiency and improve profitability. Since the beginning of 2018, not only have we've been purchasing portfolios at attractive returns, we have also reduced our leverage while simultaneously growing ERC by 11% on a constant-currency basis.

We have grown our ERC over this time period despite a reduction of $120 million in ERC from the sale of Baycorp in the third quarter. Another key component to a stronger balance sheet is timing of our debt maturities. We have taken steps over the past two years to extend maturities in both the US and Europe to provide additional financial flexibility. This is particularly constructive as we believe both the US and UK debt purchasing markets are poised for substantial increases in supply.

The recurring market opportunity is substantial within the $1.1 trillion of outstanding revolving consumer debt in the US. As well as the quarter billion dollars of outstanding unsecured consumer credit in the UK. Our continuing success in producing strong returns from these two consumer debt markets is the primary source of our optimism for the future. In total, we estimate that $18 billion in face value debt was sold by issuers in the US in 2018.

With an approximate investment opportunity of $2 billion, which is nearly double the investment opportunity in 2014. In the UK, we believe the investment opportunity in 2018 was approximately $1 billion based on $6 billion of face value sold. We have demonstrated our increasing commitment to these two markets through our capital allocation decisions and the execution of our business strategy. In the first three quarters of 2019, 94% of our portfolio purchasing was directed either toward the US or the UK and we remain on track to set another record for annual deployments in the US in 2019.

We have also streamlined and simplified our business structure through the sale of Refinancia in South America last December and the sale of Baycorp in Australia in August. These divestitures were consistent with our strategy of concentrating our resources in our businesses with the highest risk-adjusted returns. Within these markets, we believe it is vitally important to develop scale advantages in order to achieve superior returns. Encore's collective scale in these markets is unmatched and we continue to lever this advantage through disciplined portfolio purchasing in the US and UK and continually seeking to improve our operating performance in these regions.

Our improved operating performance for both MCM and Cabot has been enabled by our consumer-centric approach to collections. For MCM, it was five years ago that we belong -- began to transform the way our call centers interacted with consumers. Similarly, Cabot experienced its own consumer oriented transformation when the FCA standardized affordability assessments in the UK. In both cases, it is clear to us that the progress we have made in improving a liquidation effectiveness is driving us strong financial results and providing us with competitive advantage.

For MCM, we are increasingly collecting a higher percentage of our US collections from a lower-cost call center and digital channel. Meanwhile, our consumer-centric approach builds loyalty as demonstrated by Cabot's extremely low breakage rate on payment plans. As we grow our business, these low breakage rates lead to increasing levels of cost efficiency. In both our MCM business in the US and in our cabinet business in the UK, we are continuing to convert more consumers to payers and we are collecting more cash sooner in the collections process.

Our improvement in collections efficiency is particularly evident in our MCM business where we have grown collections while improving cost to collect. Since 2017, MCM collections have grown more than 17% while MCMs cost to collect has improved by a full 360 basis points. While Cabot has built its market leadership on unmatched scale and superior returns, it has also excelled on a very different dimension, which is best in class consumer satisfaction. Banks must weigh a number of factors when choosing the firms with whom they do business whether through debt sales or when selecting servicing partners.

Cabot consistently receives very high consumer satisfaction in independent studies and continues to win important customer satisfaction awards in the UK. When banks decide to partner with Cabot, they have the confidence that their customers will be treated with the respect they deserve reducing both the regulatory and reputation risk. Let's now turn to third-quarter performance for MCM, our US business. We deployed $173 million in the US in the third quarter, up 41% compared to a year ago and again one of our strongest purchasing quarters ever in the US.

This level of purchasing keeps us on track to establish a new record for annual deployment in the US in 2019. MCM collections were $331 million growing 4% compared to the third quarter of 2018. The principal driver of this growth for MCM was a call center and digital channel. Collections were up 10% in this channel in Q3 compared to a year ago.

As a consumer-centric approach and improved productivity continued to drive a higher proportion of collections through this channel. Initiatives to reduce cost and improve efficiency, continue to have a meaningful impact on our MCM business and have helped to improve operating leverage and reduce cost to collect, which improved 90 basis points compared to Q3 last year. Turning to Europe, our portfolio purchases in Q3 totaled $85 million and we're at returns that are 200 basis points higher than last year. These higher returns are being driven by our operational scale as well as the unique access to portfolio purchasing brought about by a leading servicing platform.

Collections in the third quarter from our European debt purchasing business grew 3% in constant currency, compared to the same period a year ago. Our European ERC of $3.6 billion was up 4% in constant currency, compared to the end of the third quarter last year. Cabot's debt leverage continues to decline driven by our improved operating performance while we maintain focus on being more selective in our portfolio purchases. Finally, Cabot's collections efficiency continues to improve as we have now completed the consolidation of our operations in Spain.

As we mentioned a quarter ago, we have passed an inflection point in our business in which the majority of our US collections are now derived from portfolios purchased in 2017 and later, which have more attractive returns than those of the recent past. When coupled with new deployments in our key markets that even higher returns, along with improvement in overall operating efficiency, we are delivering a new level of operating margin performance and profitability. Our operating margin compares favorably to our peer group and is driven by a number of factors described earlier. We have achieved scale advantages in our key markets, which share certain characteristics that include market sophistication, substantial opportunities for growth, and significant barriers to entry for new participants.

We continue to strive for improved operating efficiency by lowering our costs and moving more for collections to our lowest cost channel, the call center and digital channel. We continue to leverage advanced analytic tools and capabilities and we employ proprietary data assets to underwrite portfolios and develop collection strategies to make the most of each investment opportunity. Finally, we have divested our Baycorp and Refinancia businesses which operated with lower margins and risk-adjusted returns than our US and European businesses. Our improved level of operating performance has also led to a new level of returns in our business.

In fact, the best returns we have seen in years and is a key driver of our ability to continue to increase profits. As I mentioned earlier, our ultimate goal when setting priorities in our business is to create shareholder value. In this regard, we believe our return on equity performance is a solid indicator of attractive, steady returns to shareholders over time. With that I'd like to hand the call over to Jon for a more detailed review of our financial results.

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Thank you, Ashish. As a reminder, we will sometimes refer to our US business by its brand name, Midland Credit management or more simply MCM. We may also refer to our European business as Cabot. We delivered strong third-quarter results despite the impact of foreign currency exchange rate headwind, the magnitude of which we will identify for certain financial measures to better demonstrate the strength of our underlying business.

In addition, our results in Q3 this year do not include contributions from Refinancia, which was sold in December 2018 or the full quarter performance from Baycorp, which we sold in a transaction previously announced in August of this year. Global deployments totaled $260 million in the third quarter compared to $249 million in the third quarter of 2018. MCM deployed a total of $173 million in the US during Q3, up 41% from the same period a year ago when we deployed $123 million. This year, our MCM business in the US remains on track to establish a new annual record level of purchasing directly from issuers.

European deployments totaled $85 million during the third quarter compared to $115 million in the same quarter a year ago. As we have previously discussed, the European deployments decrease due to more selective purchasing related to our plan to reduce Cabot's leverage over time. Global collections were $499 million in the third quarter, that's flat when compared to a year ago, but grew 2% in constant currency terms. MCM collections from our debt purchasing business in the US grew 4% in Q3 to $331 million.

Call center and digital collections for MCM were up 10% compared to Q3 of last year due to the benefits of our consumer-centric collections approach and improved productivity. Collections in Europe in the third quarter were 3% in constant currency terms when compared to the same period last year. Global revenues adjusted by net allowances were a record $356 million in the third quarter, up 6% compared to $337 million in Q3 of 2018 and were up 8% in constant currency terms. In the US, MCM revenues adjusted by net allowances were a record $211 million in the third quarter, up 18% compared to the same quarter a year ago.

In Europe, Q3 revenues adjusted by net allowances were $131 million and were up 1% in constant currency terms. Our ERC was $7.3 billion at the end of September, up $76 million when compared to the end of September 2018 and up 4% in constant currency terms. This growth in ERC more than offset a reduction of $120 million of ERC associated with the sale of Baycorp in August. In the third quarter, we recorded GAAP earnings of $1.23 per share, up 78% compared to Q3 a year ago.

As Ashish mentioned earlier, Encore's GAAP earnings were impacted by our divestiture of Baycorp at August, which drove a $0.22 per share reduction in EPS after tax. After applying this and other adjustments and their related income tax effects, our adjusted EPS was a record $1.64 per fully diluted share and our non-GAAP economic EPS was also a record $1.64, up 38% compared to Q3 a year ago, when Encore purchased Cabot. Our earnings have also recently benefited from a larger proportion of our US revenues being derived from pool group with stronger returns. With that I'd like to turn it back over to Ashish.

Ashish Masih -- President and Chief Executive Officer

Thank you, Jon. In summary, Q3 was a fantastic quarter for Encore and I'm very pleased with our operational and financial performance. I continue to be very excited about our prospects. We reported record results in the third quarter as global revenues and adjusted earnings reached all time new highs.

In the US, portfolio purchases were up 41% over Q3 last year and we reported record revenues for MCM in the third quarter and call center and digital collections were up 10% compared to Q3 a year ago. We also continue to make progress on our strategic priorities, which include, number one, strengthening our balance sheet while delivering strong results. Number 2, concentrating on the US and UK, our most valuable markets with the highest risk-adjusted returns. And number 3, innovating to continually enhance MCM's and Cabot's competitive advantages.

Our progress on these priorities is strengthening our business and helping to drive a new level of financial performance for Encore. We are operating under conditions in which more of our revenues are generated by portfolios with strong returns and we are purchasing portfolios with even better returns. This highly desirable combination is reflected in our improved operating margin and the best returns that Encore has delivered in years, as we continue our focus on creating shareholder value. Now, we'd be happy to answer any questions that you may have.

Operator, please open up the lines for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Eric Hagen with KBW. Your line is now open.

Eric Hagen -- KBW -- Analyst

Great, thanks. Good afternoon, guys. Just confirming Jon, that the $19 million tax adjustments from GAAP to core, that was made at your statutory tax rate, not the 7% tax rate that was used in GAAP, right?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

I'm sorry, specifically, what are you referring to, Eric? I just want to make sure I'm answering the question correctly.

Eric Hagen -- KBW -- Analyst

The $19.1 million of tax related adjustments from GAAP to core, just the tax rate that was used to get --

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Yeah, the after-tax number for Baycorp is the $0.22, if that's what you're referring to. So that includes the tax impact. Is that your question? And so therefore, it's not in the rest. The rest are regular tax rate, if you will.

Eric Hagen -- KBW -- Analyst

Yeah. Yes. OK, that answers the question. Thank you.

Jonathan Clark -- Executive Vice President and Chief Financial Officer

That does answer the question?

Eric Hagen -- KBW -- Analyst

It does. Thanks a lot. And then can you guys just give us a snapshot in time of just how pricing and multiples on fresh paper compare now versus, let's just say, earlier in the year when I think your commentary was maybe equally as bullish as it is now? Thanks.

Ashish Masih -- President and Chief Executive Officer

So Eric, this is Ashish. In terms of the US market, when you speak of fresh paper, I think that's what you're referring to. And the market is pretty stable in terms of pricing from earlier in the year, pricing improved from '15 to '16, '16 to '17 a bit toward '18 and since then it's been stable now. Depending on the portfolio, it goes up 5%, comes down a little bit.

But in general, I would say the market is very stable and growing at a steady clip, and there is equilibrium between kind of what our returns we expect and how the sellers are selling. So pricing is pretty stable this year as we have observed.

Eric Hagen -- KBW -- Analyst

Got it. Thank you. And then, when does the term on the revolver come up for renewal at both Midland and at Cabot?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

I think it's 2021 for MCM. Cabot, I believe is 2023. Give me a second to check.

Eric Hagen -- KBW -- Analyst

OK. I guess as you search for that, I mean the positive trends that you guys are discussing, especially as it relates to your leverage, I mean do you think that will work in your favor in negotiating the loan terms on your revolvers as those come due?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Well, there is already a leverage component built into it. So I don't see an overt difference if you will, our obvious difference in our negotiation -- negotiating position, because if you think about it right, if you already have triggers in there based on leverage, so it's implicitly built already built into the document, right, the less leverage you have, the better rate you get. When the Cabot facilities coming -- comes due in 2022.

Ashish Masih -- President and Chief Executive Officer

Yeah, September '22.

Eric Hagen -- KBW -- Analyst

Great, thanks. One on the CECL actually, just before I hop off. One of the impacts, one may argue is just the stricter capital regime that banks have to work with, and I realize CECL is really just an accounting impact more than anything, and it's not economic necessarily, but do you still expect that CECL could change the behavior of banks and other credit providers in terms of their willingness or ability to sell paper or is it really just too early to tell?

Ashish Masih -- President and Chief Executive Officer

So it's not fully in effect yet. So you could say it's a bit early to tell, but I would say the banks have been analyzing the impact on their -- of CECL on their books and financials for a long time, and we have not heard any material impact in terms of sales strategies, occasionally hear it will go up or later or pressure you hear mixed things. In general, if you step back and look at what banks are talking about, we are seeing, as I mentioned last quarter, especially heightened level of activity and discussions from all major banks, I'm talking about selling, and that includes banks who have not sold for years. So, we're clearly seeing increased discussion, whether it's CECL driven or an economic outlook or a belief that loss rates may rise regardless of CECL.

I don't know, but everybody is preparing for a higher credit loss environment and we are engaged in all those discussions. So, I feel much more optimistic, very bullish about that supply will potentially increase now nobody has actually started selling but many of them are really in later stages of active discussions. So, I see that as a overall positive whether CECL had a minor positive or negative impact. I don't know for sure.

I think we'll have to wait for that one.

Eric Hagen -- KBW -- Analyst

Got it. Thank you very much for the comments.

Ashish Masih -- President and Chief Executive Officer

Sure. Thank you.

Operator

Your next question comes from the line of David Scharf with JMP Securities. Your line is now open.

David Scharf -- JMP Securities -- Analyst

Hi, good afternoon and thanks for taking my questions as well. Ashish, there're clearly seem to be sort of two things that are happening simultaneously in terms of sort of the impact in the margin profile. As you mentioned, sort of that inflection point on higher yielding vintages coupled with just the increasing mix on call center and digital collections. Focusing just on the margins, I don't want to pin you down on guidance, but I'm trying to get a sense for I guess perhaps what the end game is or the endpoint in your mind in terms of the percentage of collections that will be call center based and therefore higher margin than through the legal channel and to give us some sense sort of put maybe that in the context of where margins, operating margins, GAAP operating margins can go from what you just reported in the third quarter?

Ashish Masih -- President and Chief Executive Officer

You have a very good question, David. I think you hit on a couple of key drivers of margin improvement, which is higher multiples and returns as well as you hit on one of the elements of cost to collect improvement, which is to shift call center and digital, but the other one is just in every other channel, we're actually reducing cost to collect including G&A and overhead costs. So just overall CTC improvement combined with multiple improvement is a driver of margin. Now the shift to call center, we've been pushing on it through two things, improving our kind of call center approach.

We started that in MCM five years ago and with the acquisition of Atlantic credit and finance the call center approach gets cash and collections earlier in the cycle and before consumers have to be kind of go through the legal process in some cases. The other one is digital investments. Now we made a significant shift and we expect it should continue, but as you can imagine the marginal change could slow down and the other thing is to keep in mind, it's been a fairly homogenous mix of fresh paper with certain balance ranges that we have seen in MCM. And the mix depends a lot on what kind of paper we buy and at times a higher CDC paper could have even a higher return in terms of IRRs because we may have a mix, lower balance accounts or different kind of balances accounts or age accounts.

So, CTC is an output of our strategy and our continued push to reduce costs in each channel and in overhead. What it actually comes out depends on the mix, so over time if mix shifts a little bit toward lower balances, CTCs could rise, but we may be buying those at much higher IRRs. But if nothing else changes, I would like -- I would believe steady improvement in that mix will continue although perhaps not as faster rate as in the past, because we've made a lot of push early on.

David Scharf -- JMP Securities -- Analyst

Understood. And maybe shifting to the yield side. Once again, just looking for some help directionally. If I just do a simple gross yield calculation just taking your finance receivable revenue divided by average receivables in the quarter, I guess excluding the big allowance reversal, it is 39 and a half percent gross yield, which ticked up a bit from the prior quarter.

Given the on -- given where you're purchasing or pricing paper lately, and given the pace at which pre-2017 vintages are rolling off the balance sheet, should we be comfortable modeling north of a 40% gross yield next year?

Ashish Masih -- President and Chief Executive Officer

So in terms of the paper we are buying, you're right. So '17 and onwards is now the majority of our collections, now for US. So they have better yield and the previous ones. I'm not sure if I can answer your 40% question as directly right now.

We may have to take that offline or something. But if you look at our multiples, there is one decimal place at around 2.1 and they are slightly improving if you look at the more detailed information in the queue. And we continue -- we expect that will continue and as supply increases potentially even improve, but at this point as I said earlier, pricing is fairly stable and we are in a very good equilibrium market and that's what is for US at least and will continue. And we're focused on IRRs, just the other thing I would highlight and not multiples.

Multiples is one dimension of the return on a portfolio and the 2.1 multiple today as a much higher IRR than a 2.1 multiple a few years ago because the cost to collect is better and we are collecting cash earlier. So, those two factors in addition to our multiples are improving our IRRs as we go forward.

David Scharf -- JMP Securities -- Analyst

Got it. Hey, just one last question. One on CECL as well for Jonathan and I'll be careful on how I phrase this but my understanding is that you will no longer record allowance charges that symmetry will be restored so that any revisions of pool forecast upward downward now just flow through a new yield forecast and it seems like that reduces a lot of volatility through to downward estimates or to downward performance and does this -- does the absence of allowance charges in your mind give you a little more room to perhaps be less cautious in how you're going to set initial yields?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Well, I think there is not -- you're correct, there is no longer the asymmetric risk, David. I think what people will see and just to make stance, your yield will be set day one and to the extent that anything good or bad happens, yield discount that change in expected cash flows either maybe just a shortage for the current or perhaps a different outlook in the long term the ability of the -- for Encore to collect cash on a given portfolio, we'll make an adjustment, either up or down. So the concept of the asymmetric risk is gone, and conceptually, there is just to be clear, there is no safe harbor and conservatism in US GAAP, we try every time to put our best forecast into the mix, if you will, into our long-term projections but you are correct that the asymmetric risk is gone, the volatility that you mentioned is great cocktail party conversation and speculation, because you need to sit back and think about it, David. It comes down to your view on how correlated or not a global portfolio is in terms of, I'll call it the goods and the bads, right.

If everybody runs in one direction that could create more volatility, if they tend to counterbalance each other, then it will have -- create less volatility.

David Scharf -- JMP Securities -- Analyst

Got it. Very helpful. Thanks for taking my questions.

Yeah.

Operator

[Operator instructions] Your next question comes from the line of Hugh Miller with Buckingham. Your line is now open.

Hugh Miller -- Buckingham Research -- Analyst

Hi, thanks for taking my questions. Just, I guess I had a couple on Europe, if I may. So in the slide deck, there is a notable uptick in the cost to collect for Europe, and I was wondering if you could just maybe point out what may have been driving that and how we should think about that?

Ashish Masih -- President and Chief Executive Officer

Yeah, Hugh, this is Ashish. Thanks for your question. Yeah, so last year Q3 in 2018, there was a bit of an adjustment and catch up for the first two quarters of the year, that's what caused the CTC for Europe to be lower than normal that you would see a year ago.

Hugh Miller -- Buckingham Research -- Analyst

OK, great, that's helpful. And then maybe a couple for Ken. One of the kind of positives around the Wescot acquisition was just the ability to potentially buy accounts that the tails of the accounts that Wescot's servicing and I was just wondering, has that become a source of capital deployment for Cabot? and if so, how does that return profile look compared to what you're seeing in the open market?

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Yeah. So if I answer that directly, Ashish, so yes is the answer. It's not the same every quarter, but if I look at this year and last year, I would say a considerable percentage, something like a third of the deployment in the UK would have been from holdings of effectively servicing on the Wescot side of things and the return is better definitely, I can't give you a precise number, but I would talk in the sort of 100 basis points IRR range. And that comes from not necessarily a difference in the approach of pricing with the seller, we're going to give the clients the best price we can, but we understand the book so much better.

I mean, understanding the way in which we're going to collect on those books so much better than we were able to deliver a higher liquidation come from day one, so it is proved to be very successful strategy revisited and it's come along as by virtue of the clients wanting to sell their books and those books being managed by Wescot, so it's continued to be successful now. This will work for us going into the future, because as defaults rise in the UK, Wescot receives more of that flow of fresh debt into the market through its collections facilities and the banks will continue to have more and more stock to sell that is from Wescot. So this is not something that runs out over time. It's a continued advantage of this acquisition.

Hugh Miller -- Buckingham Research -- Analyst

That's a definitely helpful color. Thank you for that and then maybe a question on France. We're hearing a little bit about arise and secured NPL sales that are going on in that jurisdiction. I was wondering if you could maybe comment about what you're seeing in the non-performing space there and maybe a sense of how -- I know that the focus is on the UK at this point, but how much are you deploying in France and what could that be over time if we are seeing a rise and opportunities there?

Ashish Masih -- President and Chief Executive Officer

Yes, it's a very good question. So I think France is certainly now seeing a shift in mindset. There is a lot more conversation happening, a lot more coming to market I would say in the secured space certainly, there have been some big transactions that have happened, we haven't participated in those. We're looking at potentially servicing some of those going forward, but not deploying capital in France as we speak, but in unsecured the market has, I would say, growing by about 50% already and could be going up further from that, obviously from a relatively low base and as yet, I think our deployment is still relatively modest in France.

So we will be spending circa, sort of, EUR10 million to EUR20 million not anything greater this year, but I think over the next few years, I would expect that to rise to quite a meaningful number.

Hugh Miller -- Buckingham Research -- Analyst

Thank you for that. That's definitely helpful, and then I guess one on Spain. One of your peers reported some collection challenges in Spain. And I guess particularly in the legal channel, how is Cabot viewing the operating environment there and how much of your legal expertise from Midland can you apply in the Spanish market?

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Well, first of all, I think what you're referring to is quite different. I mean the troubles that were recorded by one of our competitors in the last few days and that Q3 results were much more driven by the BPO contracts that they had effectively bought large scale ones in the Spanish market and some of which should come to a point of termination and we haven't done that at all in our business, all of the business we've been growing over the last few years has been organic both in service and in deployment in unsecured. So, I don't think it's a route across in any way. I think as Spanish business is benefiting enormously from the integration benefits of two, while arguably, sub-scale businesses to be brought together subsequent to the integration in mid 2018.

We've actually made those businesses considerably more efficient. And I think we are now competing very effectively. I think we're probably leading in certain asset classes in non-performing unsecured loans and growing the business very, very positively on a bottom-line basis. So I'm feeling very positive about Spain coming from relatively small scale and growing.

We don't have the legacy of the BPO contracts that are running down. So it's very different story for us.

Hugh Miller -- Buckingham Research -- Analyst

Got it. That's helpful. Thank you. And then one last from me, just as we think about kind of the collections in the UK, obviously, you guys have significant headroom between the payment plans that you receiving and the disposable income from the consumer, but given the prolonged uncertainty around Brexit, is there any impact that you're seeing there, just in terms of the ability to generate collection lift? And does it weigh on the consumers' mindset and the discussions you're having with them? Any impact whatsoever you're seeing there on the cash collections?

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Very good question. As we are spending an awful lot of time monitoring, I think the best answer I can give you is that on plans and regular small payments, we're not seeing any impact, I think they have, as we had predicted, been really robust. I think as you approach various different deadlines for Brexit and there have been many, there is some evidence that customers hold back from making settlements in just running up to those particular deadlines. And then as the six-month extensions go through, I think some of those settlements then come through again.

But you can be in danger of reading too much into the Brexit deadline impact, but we're certainly sort of quite focused on making sure we can predict as much of it as possible. I think the more overriding trends in the UK are driven by some other things that people don't spend as much time thinking about. I mean if you look at UK default rates in the past few years, it's been a very benign environment, lowest for many, many years, but we are going to be seeing rising defaults in the UK, driven by some important changes. I mean obviously the unsecured lending has been driven upwards, has been an opening up of underwriting criteria and then very importantly from a regulatory perspective, there is change in persistent debt, which means that those customers who have regularly only paid their minimum payments on credit cards over a 12-month period are going to have to be put on higher payment amounts and that's causing and will cause more default in the UK.

So, I think we will see in the UK, higher default rates higher flows into our business. It's not a matter of whether they can go up. It's a matter of how much. So we are preparing ourselves to be ready from a capacity perspective to take on that additional volume and to keep our clients in a position where they can suppress that default rate as much as possible.

Hugh Miller -- Buckingham Research -- Analyst

Thanks, Ken. It's very helpful insight.

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

No problem. Thanks for the question, Hugh.

Ashish Masih -- President and Chief Executive Officer

Your next question comes from the line of Robert Dodd with Raymond James. Your line's now open.

Robert Dodd -- Raymond James -- Analyst

Hi guys, just a couple. First I'll follow up on the Brexit question. I guess it keeps getting kicked on load every quarter. Given the latest talk, right, which is I think already been thrown in the dust bin, would it add any incremental complications to you if there was a hypothetical European data protection directive line down the middle of the Irish Sea? I mean you've got operations in Ireland, and in the UK, but would it add any complications to collections for the Northern Ireland?

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

It's a very good question. And we've been spending quite a lot of time making sure that we are prepared for exactly that eventuality, so making sure that a day after any hypothetical Brexit we can answer a European client who wants to know where the data resides and making sure that it doesn't reside outside the future definition of the EU. But we are really very well prepared with our databases and on IT barriers to ensure that we can reassure those clients in all regards. So there is no issue in our European structure from a regulatory perspective, because all of our business is also pretty regulated.

The one thing that we do need to make sure we can reassure our clients on is the resident location of all of our data and we are well prepared to be able to do that. So we don't see any impact on our ability to collect in different jurisdictions or indeed to keep our clients happy with respect to where the data resides.

Robert Dodd -- Raymond James -- Analyst

OK, got it. Thank you for that color. And then one more unrelated to that but regulatory, any update on adding rule-making process in the US?

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

So, that's a US question, is it?

Robert Dodd -- Raymond James -- Analyst

Yeah.

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Ashish, you want to?

Ashish Masih -- President and Chief Executive Officer

Hello, Operator? Yes, we were cut off. We just back in. Something happened so we had to dial back in through the operator. Can you please repeat that question.

Robert Dodd -- Raymond James -- Analyst

I'll repeat the question. Any update on rule-making in the US?

Ashish Masih -- President and Chief Executive Officer

Robert, the only update is the comment period has ended and a lot of comments were filed, we filed our comment than the original timeline that was set. So after the rules are promulgated. I think it's going to be a year to take into effect. So at this point, I don't have a timeline.

I was expecting perhaps mid next year for rules to be in effect, it's possible, it still happens, but maybe some delay. That's the best we know for now. But their comment period has ended. So that key step is done.

And there's a lot of comments. So I'm sure the CFPBs analyzing those and will be kind of incorporating those and/or any changes into the proposed rules.

Robert Dodd -- Raymond James -- Analyst

OK, got it. Thank you.

Ashish Masih -- President and Chief Executive Officer

You're welcome. Apologies. Somehow we were cut off. So we are back in now from San Diego and I know today is a very busy day for companies' earnings announcements I think in a long time, it's one of the busiest day ever or something like that.

So I believe many companies are conducting calls. So we do not have any more questions in the queue that we can see. And this concludes the call for today. Thank you all for taking the time to join us.

We look forward to providing you a fourth-quarter 2019 results in February. Thank you.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Bruce Thomas -- Vice President of Investor Relations

Ashish Masih -- President and Chief Executive Officer

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Eric Hagen -- KBW -- Analyst

David Scharf -- JMP Securities -- Analyst

Hugh Miller -- Buckingham Research -- Analyst

Ken Stannard -- Chief Executive Officer of Cabot Credit Management

Robert Dodd -- Raymond James -- Analyst

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