May 12, 2016
Executives
Darby Schoenfeld - Director, IR Steve Fredrickson - Chairman & CEO Kevin Stevenson - President, CAO & Interim CFO Neal Stern - EVP, Chief Investment, Analytics, & Operational Strategy Officer Tiku Patel - CEO of PRA Group Europe
Analysts
Hugh Miller - Analyst David Scharf - JMP Securities Bob Napoli - William Blair Robert Dodd - Raymond James Mark Hughes - SunTrust Robinson Humphrey
Operator
Good afternoon and welcome to the PRA Group Earnings Conference Call. [Operator Instructions] As a reminder this conference call is being recorded.
I would now like to turn the conference over to Ms. Darby Schoenfeld, Director of Investor Relations for PRA Group.
Darby Schoenfeld
Thank you. Good afternoon everyone, and thank you for joining us.
With me today are Steve Fredrickson, Chairman and CEO; Kevin Stevenson President, CAO and Interim CFO; and Neal Stern, Executive Vice President, Chief Investment, Analytics, and Operational Strategy Officer, Tiku Patel, Chief Executive Officer of PRA Group, Europe will be available to answer questions during Q&A. During our call we will reference certain non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings press release we issued earlier today, and our related Form 8-K filed with the SEC. Both the press release and the 8-K can be found on the Investor Relations section of our Web site at www.pragroup.com.
A replay of this call will be available shortly after its conclusion. The information needed to listen to the replay is contained in the earnings press release.
We will also make forward-looking statements during the call, which are based on management's current expectations. We caution listeners that these forward-looking statements are subject to risk factors that could cause actual results to differ materially from our expectations.
Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. All comparative measures today will be between Q1 of 2016 and Q1 of 2015, unless otherwise noted.
I'd now like to turn the call over to Steve Fredrickson, our Chairman and CEO.
Steve Fredrickson
Thank you, Darby. On today's call I'm going to focus on providing a high level overview of our current operations, allowing Kevin more time to get into both operational and financial details.
We'll also have Neal Stern providing overview on some of our more tactical operational strategies, both in the U.S. and in Europe.
Finally we will wrap up as usual with Q&A. I'd like to remind everyone that, however, that we do not give earnings guidance and never have.
I want to make it clear that we believe we can do our job with running the Company best by focusing on driving profitability over the long-term and letting the investment community do its job of assessing our progress over time. I personally believe that short-term focus on quarterly earnings is not the right way to run or evaluate the company.
So while we will make every attempt to provide you with the facts and observations that allows you to understand our performance. We will not evolve into a granular discussion of 2016's EPS outlook.
Broadly speaking, cash results from our global operations were generally in line with our internally forecast expectations. Our GAAP results, however, deviated from these cash results for a number of reasons, including non-cash FX fluctuation and revenue recognition rates.
We'll provide more details for you on both of these items. In the U.S.
our strategy is to take advantage of our access to low cost capital, low operating costs, scale and underwriting prowess. All of these strengths, along with a significant regulatory environment in the U.S.
have helped consolidate the core market over the past five years. Our goal is to control a large portion of the market in the U.S.
but with the caveat that we anticipate at all times this will come with appropriate returns. We're not interested in market share at the expense of returns.
We do believe we may be seeing signs of more favorable pricing in the U.S. core market.
In the rest of the Americas, our goal is to build best in class debt buyer in the geographies in which we are currently located, specifically Canada and Brazil. However, we firmly believe Latin and South America contain further attractive geographies in which we can expand.
With our investment last year in RCB, we now have both a world class management team, which we can lever, and a proven operating model, which we anticipate can be used repeatedly as we look at further geographies. Ultimately, we wish to build all of the U.S.
operating strengths I mentioned earlier, however that will take time. The exciting fact is, we've done this before and we export much technology and expertise from the U.S.
experience. In Europe, much like the U.S.
our strategy is to press our advantages of cost and access to capital, operational excellence and underwriting prowess to compete effectively in the geographies where we're currently present. We have a history of benefiting from both scale and analytic superiority by vertically integrating our businesses.
This is a key focus for us in Europe and we've made great progress over the past couple of years in markets such as Spain, the UK and Germany, all locations where we have decent sized, internal collection operations. We're in the early stages of adapting a more analytics driven operating strategy in a number of other geographies where we have our own collection operations.
Overtime, you will see us pursue the same strategy in other countries where we currently are mostly or completely reliant on third-party servicers. Given the irregular pace of debt sales in some European geographies, I believe we always use servicers to help us flex our workforce.
However, in virtually every country we can benefit from the increased in-house collection capabilities. In Poland, this strategy is actively underway.
Our tender offer for DTP was a result of more than a year of hard work to establish our own collection operation there. Our team performed exceptionally sourcing the DTP opportunity, and in the end we feel we acquired a good operation for years of data and an ERC footprint at a reasonable cost.
We look to fully integrate DTP in the coming months, as we delist it. Although we are putting PRA Group executives with experience in home based collection center to help with DTP, most of its former employees will be staying with us.
We feel as though Poland is an excellent long-term market for us and we look forward to growing there over time. Italy is another country in which we see a lot of opportunity.
We entered there several years ago and have purchased a number of portfolios since. More than a year ago, we began taking steps to establish our own operations in Italy, rather than be completely reliant on third party servicers.
To be candid, we had a couple of missteps in effectively and efficiently carrying out that strategy, delaying the process by six to nine months. While this was going on, the performance two of our larger more complicated portfolios began to suffer, since we were not crisply executing the collections strategy [Technical Difficulty] established for [Technical Difficulty] of underwriting [Technical Difficulty].
The legal collection process in these two portfolios is a number of months behind plan and with it associated cash flows. We've created a team of both European and U.S.
based talent to address this issue from all sides. We've got confidence that we're doing what needs to be done to rectify the situation.
We feel that the majority of the issue with these two portfolios is going to be a delay in collections, not a permanent loss, but only time will tell if we are correct. In the meantime, we've taken substantive accounting moves to address the issue, recognizing zero revenue from both portfolios and letting all cash flow amortize the investment, even though doing this is impacting us in a big way from a revenue perspective.
We're building our own in house collections capability in Italy, in part using an unique structure pioneered by our executives at RCB in Brazil. They've been working closely with our European and U.S.
teams to apply best practices to our situation in Italy, and as a result we believe we're going to be able to more quickly address our issues there. Please understand this is a long-term issue for us, one I'm certain we'll will dealing with for the next year or more.
The important thing besides enabling us to optimize investments already made in Italy, is to put us in the possible situation to be a competitive debt buyer in that country for years to come, as we see significant opportunity there for someone who can optimally negotiate the fragmented, complicated Italian banking and collection world. In the rest of Europe, we look to take advantage of our significant data set and operating capabilities to build scale wherever we can't find opportunities or appropriate returns.
In some cases, this will mean just acquiring portfolios. In northern Europe we were very successful in deploying capital in Q1 in just such an opportunity.
In other cases, we will be looking at entering new geographies, especially where we can partner with or acquire existing best in class servicer or debt buyer. We're actively reviewing such opportunities on a constant basis.
In still other situations, we will look to add to our existing operations and create additional scale through the acquisition of other platforms, with or without purchase portfolios attached. Like any business, ours is all about daily execution.
We've made of number of acquisitions of companies over the years, and we completely understand the difference in their value made possible by great versus average execution. We focused enormous effort on integrating the active capital purchase over the past few years, and I feel that has paid off well for us.
Although on a much smaller scale, we will also pay close attention to the integration of DTP. It's one thing to write the check and make the acquisition, quite another to make things work well over the long-term.
I'd rather do fewer deals and get them right. When we look at the history of our industry, both in the U.S.
and Europe, Company acquisitions in the armed and debt purchase space have likely destroyed a lot more value than they've created. Although we have competitors globally who appear quite impatient pursuing a breadth of growth agendas, we are not.
Our strategic focus is the same as it always has been, looking out over the long-term, trying to ensure that we're able to be in the right market, be it in a vertical or geography, at the right time with the right capital and expertise to take advantage of investment opportunity. Sometimes the strategy lies up nights when it's steady and growing EPS, sometimes it doesn't.
But our focus is unchanged. We want to generate exceptional profitability over the long-term, not have the most revenue, the largest headcount or be in the most geographies.
I believe our history has amply demonstrated our abilities to do exactly that over the past two decades. We have a lot of operational details to get into with you now, and Kevin and Neal will take you through that.
Kevin is still pulling double duty as President and CFO. We have been purposely picking our CFO search to reveal this is a critical hire for us.
We're looking for someone with experience running the finances of a complex, multicurrency organization, will also share in the values of our unique corporate culture. We will not rush the decision.
With that, let me turn things over to Kevin.
Kevin Stevenson
Thank you, Steve. To better analyze our ongoing operations, we began adjusting for certain items.
Our goal is to assist you to better understand the year-over-year comparisons. The quarter of these items are as follows, but please note that the first two of these items were small, while the more impactful change Q over Q is at best.
The first release to expenses ties to the acquisition environment fee of DTP of $1 million. Second, our legal costs not associated with normal operations were about $500,000 for the quarter.
And lastly, we have adjusted to reflect constant currencies with Q1 in 2015. As a reminder we're impacted by a number of currencies -- seven in Europe alone.
These currencies move against each other and they can generate gains and losses. So it is not just the movement of currencies versus the dollar that affect us.
As a full GAAP reconciliation of these non-GAAP items, the most directly comparable GAAP item in our press release filed earlier today. Supply in the U.S.
remains constrained by the absence of several large sellers from the market, a situation that is existed now for years. However, in spite of these headwinds, we were able to invest $337 million globally, with $178 million of that in Europe.
We continue to monitor pricing, paying very close attention to returns and work with all of our sellers to provide them with partners who offer the best solutions for their nonperforming loans. Insolvency remains a challenge on the first two fronts, but we did deploy $28 million globally in the quarter, though not what I would call robust, the insolvency pipeline for Q2 looks more ample than we've seen in some time.
Finally, Brazil received excellent deal flow and pretty returns. We continue to be with pleased with our team there and the performance of portfolios are exceeding our expectations.
On to the results, forecast collections for the quarter decreased 4% to $384.3 million. Currency-adjusted cash collections were $389.7 million, a decrease of 3%.
Core collections in the Americas were $219.6 million, flat to last year. Collections outside legal recovery grew 8%.
Legal cash collections in the Americas continue to be depressed, by both better results in our call centers and other factors, Neal will detail for you shortly. Currently adjusted core collections were $221.3 million in growth of 1%.
Global insolvency collections were $70.7 million, a decline of 27%. While this expected decline continues, the collections were actually better than our expectations in Q1.
European core collections were $94.1 million, an increase of 12% over last year. This is attributable to increased buying we have done in Europe.
The currency adjusted core collections in Europe were $97.7 million, a growth of 17%. As Steve mentioned, there was a deviation from cash results and GAAP results.
One of the big factors causing us is portfolio reorganization, which rose to a record level [indiscernible] 46.3%. There are a number of factors contributing to this, but I want to focus on two specific cases that contributed significantly to the increase in amortization.
In the third quarter of 2015, we closed the largest portfolio we've ever acquired in our 20 year history. The original purchase price was over $200 million.
This is a paying portfolio with many customers already set up on established payment plans. As such, this portfolio has associated with a lower operating expense ratio than your typical nonperforming deal.
Correspondingly, a lower purchase price multiple. This in turn drives a higher amortization rate over its life.
This naturally higher amortization rate is then compounded by the fact and during the first several quarters we've owned the portfolio, it has been outperforming underwritten expectations with most of that outperformance going to amortization. This large portfolio is one that we want to model very carefully under U.S.
GAAP accounting. And so it was booked at a yield or sometimes less than what was underwritten to.
The resulted accounting is to depress revenue and increase amortization, with which we gained further confidence in our performance. The marked over performance that I mentioned previously, has driven an excess amortization.
While we did move the yield up in this quarter, we have thus far recognized the vast majority of the life-to-date observed outperformance with acceleration betterment. This is all great news from a performance, cash and IRR perspective, but it's definitely not reflected in our GAAP revenue notes.
This is a whole another situation where we have over collected our cash expectations. There are lights revenue recognized is global client, where original projections would have placed it at the end of March.
We continue to monitor the portfolio to the extent we decided the outperformance is betterment, helping you read as possible, we will move up as appropriate. The second factor is significantly impacting amortization, as occurred in Italy.
Steve went into the detail on this so I will skip right to the impact it had on the quarter. By taking these two pools off yield and putting them on the elector pool, we recognized no revenue for the 100% of cash collections.
We've got around $7 million going to amortization. When they keep these two pools on a similar treatment for a quarter or two, or even a year, depending on how quickly we can get legal collections process going.
We believe we have a solution, but as with all legal collections, once addressed it will take some time to start receiving the corresponding revenue. There also some more normal factors that contributed to higher amortization rates in the first quarter [Technical Difficulty] as well as first quarter seasonal cash collections in the U.S.
Note, the total allowance charges were lower in Q1 than in either of the past two quarters. In the Americas, we incurred a net allowance charge of $7.7 million.
This was mainly due to $6.5 million in gross charges related to the 2012 and 2013 core collections, compared to $7.7 million, the charges in Q4 and Q3 of 2015 which were $7.1 million and $8.9 million respectively. Remember that allowance charges in the U.S.
have been taken on quarterly pools that have significantly outperformed their underwritten levels. As that over performance occurred, yields and forecasts were taken out in accordance with GAAP, which we believe the over performance would occur in the entire curve, including legal collections which tend to come later.
We talked over the past two quarters about how the strength in the call centers actually pulled some of that cash we normally expect from the legal channel earlier in the curve, this concept of acceleration versus betterment. These last few quarters have been an effort to reset the curve to the proper levels, but in all cases they're still well above underwritten levels.
This is just what we deal with when it comes to U.S. GAAP, once the yield goes up, even though it's well above the original yield you can never lower it.
Neal is going to talk about some regulatory and legislative items that have occurred more recently that are compounding the shortfall in the collections beyond the impact of call centers pulling collections forward. This is also contributing to allowance charges.
In Europe we incurred a $2.2 million allowance charge in the quarter, which was lower than either of the two prior quarters in Europe. This is primarily attributable to the test portfolios we mentioned last quarter, as well as other pools in Italy outside of the two larger ones we just mentioned.
European pools will naturally be more sensitive to allowance charges than pools in the U.S. Within the U.S.
we aggregate all purchases in our product into one quarterly pool. This generally means we'll get two accounting pools per quarter with multiple individual purchased deals inside them.
In Europe however, we aggregate purchases into one quarterly pool per country and with the irregular selling that goes on, it is possible that we have only have one purchased deal in a quarterly pool. On a GAAP basis this simply makes Europe more sensitive to any one given purchase deal as compared to the United States.
Net accounts receivables or net par revenue was $206.5 million. Currency adjusted, net par revenue was $209.3 million, a decrease of 8% from Q1 2015.
Fee revenue increased to $16.3 million from $13.1 million, due to improvements, improved performance TLS, and the acquisition of RMFC and RCB, both of whom have deeper service aspects to their businesses. Other revenue decreased to $2.1 million from $3.7 million, primarily due to fund revenue from one of our European investments, which varies from quarter to quarter, second offset by an increase in revenue from Poland.
Currently adjusted fees and other revenue was $19.3 million, an increase of 15%. Total revenue for the quarter decreased 8% to $224.9 million.
Currency adjusted to total revenues was $228.6 million. Operating expenses were $154 million, up 3%, and non-GAAP operating expenses including both currency adjustments and some relatively small non-GAAP items were $154.2 million, an increase of 5%.
GAAP operating expenses were 38.4% of cash receipts in the quarter, in line with the first quarter of the past five years which ranged with a low 35.7% to a high of 40.9%. The increase in operating expense is primarily driven by increased outside fees and services and agency fees, offset by a decrease in legal collection costs.
Agency fees have increased, primarily from growth in international collections, where we will utilize third party agencies. Outside fees and services increased due to a smattering of different items that combined were impassable.
As we look forward, given the productivity improvements we've been able to realize in the U.S. we have reviewed our operations in an attempt to optimize staffing.
As a result, we decided to close our call center in Las Vegas. Because of low utilization and higher cost lease it did not make sense to renew at its term end in June 2016.
We're absorbing virtually all of the work performed by the approximately 100 employees there into the other existing call centers. It fits our collections efficiency has increased so significantly, we believe we do a majority of that work with minimal FTE replacements.
This will generate full year annual savings of approximately $3 million for us, with largely no impact to collections. Operating income was $70.9 million and our operating margin was 31.5%.
Non-GAAP operating income was $74.4 million with a 32.5% operating margin. Our effective tax rate was 33.1% for the quarter compared to 34.7% for the full year 2015.
Net income was $32 million compared to $58.1 million in the same quarter last year. And diluted EPS was $0.69 versus $1.19.
Our net income margin was 14.2%, compared with 23.7% Q1 of 2015. Our non-GAAP net income was $39.5 million, compared to $59.9 million in the same quarter last year, and diluted EPS was $0.85 [indiscernible].
Our non-GAAP net income margin was 17.3% compared with 24.4% for Q1 of 2015. Looking at the balance sheet, cash balance ended the quarter at $79.4 million compared with $40.5 million a year ago.
Our NFR balance was $2.3 billion, up from $1.95 billion at March 31, 2015. These balances do not include the equivalent of NFR total portfolios that are recognized as other revenue.
Our estimated collections were a new record of $5.3 billion at March 31, 2016 Net deferred tax liabilities were $269.2 million at quarter end, mostly unchanged from $265.7 million a year ago. Borrowings totaled $1.9 billion at quarter end.
Our debt to equity ratio at period end was 219% if you include the deferred tax liability and interest government deposits and debt, and exclude the accumulated other comprehensive loss impact from FX equity. The debt to equity ratio would be 209%.
Borrowings for the quarter was 16.4% and non-GAAP ROE was 18.9%. Finally, we are frequently asked to discuss our Federal income taxes case at the IRS; which is difficult for us to do, since we generally do not comment on pending litigation.
All I can say is we believe we've assembled an excellent team of attorneys and expert witnesses and we look forward to presenting our case to the court. The trial is scheduled to begin in September.
I will now turn the call over to Neal.
Neal Stern
Thank you, Kevin. During the quarter, we collected about 2.5 million U.S.
payments. The average size of those payments fell by 7%.
Because we like to try and isolate the impacts of purchase mix type, our preferred metric for assessing the consumer's condition is by examining cash collected per original acquisitions score point. In the first quarter that metric decreased by 1%, which I think more accurately conveys the current magnitude of several issues.
Breaking that metric down by collection channel, we saw call center performance improve by 7%, internal legal deteriorate by 9% and external legal deteriorated by 14%. In prior quarters, call center performance had more than compensated for legal collection under performance.
This was not the case in the first quarter. The U.S.
call center continues to benefit from ongoing improvements in scoring, that reduced incremental culling into less profitable segments and the productivity improvements related to those in place continue to compound and provide meaningful opportunity that should extend into the coming year. It would be our expectation that collections' productivity figures will stay on this improving trend throughout 2017.
The productivity boost is being modestly offset by the increases in our written and verbal dispute rates, which have risen as a result of our contempt order. This is generating a cash collection delay, as we need to respond in writing with various documentations before we can resume collecting on those accounts.
Total U.S. legal cash collections for the quarter were down by $9.8 billion or 11% over the last year.
The reduction reflects improved call center performance from the prior year, and a modest amount of inventory that's been transferred out of our legal collection process in our call centers. More importantly, as Steve talked about on our last call, legal collection performance has suffered delays and some loss of inventory relating to regulatory and legislative events including state law changes, jurisdictional rule changes and our consent order obligations, all of which are directing us to obtain different or incremental documents that will be required concurrently.
Compounding this issue is the timing lag that has resulted from our internal and external lawyers working diligently to make the retool systems and processes exceed the standards of the legislative and compliance landscape that has evolved quite a bit in the last year. This is creating a slowdown in inventory moving through the legal pipeline, causing spending on legal collection cost increased by 24% or $4.8 million during the quarter.
This reduction in year-over-year spend, along with the reduction in spend over the last several quarters has left us with a headwind of legal collections through the remainder of 2016 of at least an additional $10 million to $20 million. We believe Q2 and Q3 will be the most impacted, and then taper in Q4.
Rate of legal spending in Q2 likely to be flat to Q1, and then in the second half of the year, spending should elevate from these levels by 20% as the bulk of our retool collection legal process will be complete. Interestingly, when all the three tooling is behind us, the legal collection process should actually shorten.
Currently the average weighted month of legal recovery is month 18, and in the future we'd expect to see that number come down as we complete some straightforwardness of the documentation that we had in hand at the time of purchase allows us to expedite a legal recovery option in instances where a consumer has the ability of excellent [indiscernible] Across Europe cash collections per paid hour increased by 16% reflecting improved efficiencies and some purchasing mix changes European average payment sizes were down 4% but on a fixed currency basis average payment size is flat. In the UK and Spain where we can measure cash collections per acquisitions corporately, those results were up 16% and 19% respectively.
The strong performance there was a result of operational improvements in both countries and improving macro economic conditions in Spain. Significant work has and it's being done in the UK and systems and scoring and the expectation is for operational improvements there to increase momentum and impact in the second half of this year.
Operational improvements in Germany are also taking hold with stronger performance there should also help performance going forward. In Italy we've worked diligently to develop a new legal scoring model as we believe legal collections represent the most critical improvement for us to make.
Our modeling suggests there is a precise and impactful way to move the subset of accounts through the legal collection process and materially improve our total collection performance. While this will take several quarters to fully execute it will generate incremental real cost about $3 million in 2016 and the returns from that spending should deliver 50% return on investment will take one year, and exceeded 200% return on investment by the end of the second year.
Modeling and scoring is, of course, also beginning to impact our other European markets positively and we are confident that our data driven approach to more segmented collection strategy will have a significant long-term impact and deliver a meaningful competitive advantage for PRA Group. Operator we are now ready for questions.
Operator
Thank you. [Operator Instructions] Our first question comes from Hugh Miller of Macquarie.
Your line is open.
Hugh Miller
I guess, wanted to talk a little bit in Europe, obviously you guys mentioned that you had very strong purchasing there, about 173 million. I think you've mentioned that a large portion of that, or a good portion of that was in northern Europe, is that correct?
Steve Fredrickson
Yes. That's correct.
Hugh Miller
Any color on the jurisdictions that you are seeing opportunities there? And we've heard some of your peers talk about very strong supply in the UK during the first quarter -- was that something that you saw as well?
Steve Fredrickson
We've continued to see good pipeline for 2016, we believe really throughout Europe.
Hugh Miller
Okay. I know that typically 2Q tends to be seasonally stronger than the first quarter.
I was just wondering if there was any pull-forward of deals or is 2Q supply in Europe shaping up as you would expect with a seasonal lift in the second quarter?
Tiku Patel
Hello, Hugh. This is Tiku Patel.
Q2 is looking as it normally looks with a good pipeline. These deals are becoming larger and more binary and their timing can change.
It's very difficult now to predict exactly in which quarter some of these deals will complete and get done, but as Steve has said, the pipeline looks strong for Europe.
Hugh Miller
Okay. That's helpful.
Then just another question, too, within Europe, we have seen Greece, where there is some starting of account placements with third-party collectors. I was wondering, is that a market that you see is an opportunity for PRA Group?
And if so, what would be the time horizon in which you would anticipate potentially moving to a selling model and starting to see some opportunities in that market?
Steve Fredrickson
We don't currently have any capability in Greece, like elsewhere in Europe where we are not located. We're trying to keep our feet on the ground and make sure that we're evaluating opportunities that exist.
I don't have any specifics to provide you at this point in time, but opportunities in Greece are one of the things we're trying to keep on our radar screen.
Hugh Miller
Okay. With regard to the Italian portfolio, as you mentioned that went to non-accrual, I think you mentioned there were 7 million of amortization costs.
Was wondering, was it 7 million of incremental amortization or were the cash collections 7 million and obviously all amortization?
Steve Fredrickson
Good question, Hugh. I hear that some of our call quality may not be great.
But the answer is a $7 million of cash collections that all went to amortization.
Hugh Miller
Okay. So 7 million in cash collections got you.
And then on the Americas' core portfolio, the collection just came in below what we may have been looking for. I had a question is that just a function of less legal?
It seemed like you were talking a little bit about that with the lag and going more towards the call centers. Or was there any impact that you guys noticed from the tax refund season in the quarter?
Kevin Stevenson
I tried to mention in the script what I thought was going on. So if we look at collections per acquisitions [indiscernible], the call centers were up 7% and legal internal and external were both down by a good chunk.
And the call centers were not able to cover that this time. I really attribute the majority of what I perceive as a cash shortfall to what's going on in legal, and I believe the majority of that sits around various jurisdictional law changes and process changes that are being made.
I think the end result is most of this is going to be a delay, there will be minimal loss and it will just take a few months to kind of fully sort itself out.
Hugh Miller
Got you, okay. Last from me, I think you guys had mentioned in the prepared remarks that you are seeing signs of better U.S.
core pricing. I wanted to know if I was hearing that correctly, and if so, what's driving that now?
Are you seeing ROIs on a relative basis, compared to last year?
Steve Fredrickson
We mentioned that we believe we are starting to see some softening in pricing. If we're competing for deals on a portfolio-by-portfolio basis, we had been seeing deals trade where we feel like we've got insight and slightly improved IRRs from where we might have been a year ago.
So I would say that at this point that trend is far from conclusive but we felt that we had enough visibility to at least make the comment on the call.
Operator
And our next question comes from David Scharf of JMP Securities. The line is open.
David Scharf
Yes, thanks for taking my questions. First, I wanted to make sure I understood the outlook that was provided by Neal regarding legal collection costs being flat in Q2 relative to the first quarter and then 20% higher in the second half.
Are you referring to the 17 million of internal cost?
Unidentified Company Representative
Yes.
David Scharf
Okay. So effectively we're talking, from a strict dollar amount, roughly that amount in the second quarter, and then 20% higher than that in the third and fourth, respectively?
Neal Stern
Yes, just the legal costs line, yes.
David Scharf
The second question you just partially answered with the last caller, it sounded like call center collections per score point was up 7%. I just wanted to get a sense from a broad macro standpoint whether you are seeing any changes in consumer behavior or if you still feel as positively about the U.S.
consumer as you did on the last couple calls?
Neal Stern
Yes, the only negative that I alluded to is that we are seeing more disputes, and now there's a requirement for us to get documentation on our response. And there's again going to be another small lag in cash collections for the call center as that documentation is assembled and mailed out before we can put them back into the collection work where appropriate.
There's a little bump there, but by and large in terms of consumer health, outside of legal and the call centers, I don't see anything concerning.
David Scharf
Are you seeing--is there any change in consumer behavior in terms of, given the news flow and the CFPB at the state level, all the various regulatory entities that have effectively drawn out the legal collection process required more documentation, perhaps raised the bar a little bit for you? Are you seeing any change in consumer behavior in terms of the willingness to drive you to that legal process?
Meaning a greater propensity of consumers who have the ability to pay but are refusing to?
Neal Stern
The changes I observe are not with consumers and their behavior. I think those changes that are of note, if there are any -- are the lawyers and them desperately wanting to be perfectly comfortable with how these tweaks and changes in processes have affected the paperwork that they are signing off on each and every day.
And they are not going to do it until they have perfect clarity and confidence, so the amount of angst around all of that's, that's been different.
David Scharf
Staying on the same topic, when I look at the North American core ERC, it looks like it entered this year, entered 2016 to 15% higher than it entered last year, yet cash collections were down. I know they don't follow linearly, they shouldn't be expected to be up 15%.
But as we just think about being up 15% year-over-year, but collections being down, is that entirely attributable to this issue around legal collections? Or is there also a greater or longer tail or partial payment period on newly originated portfolios, just trying to figure out how to think about the delta between the ERC growth and the collections growth.
Steve Fredrickson
Yes, I don't want to repeat myself too much but it points back to the legal side of the house, the ERC is being affected most prominently by these delays in our legal process, that's where we see all of the impact -- or not all -- the majority of the impact on cash collection is really centered there. You really can't get your head around how much change there's been -- you've had a dissent order from the CFPB with Hanna, you've had all these courts changing the rules, law firms have decided they can't take it anymore and they're going to consolidate and roll up with each other.
The list goes on and on and on. There's a lot of moving parts there and they all just need to get settled down.
I think it will resolve itself. We're just going to take a quarter or two to get a better view of where we stand.
David Scharf
Just a couple more, the share count declined, I assume there were some buybacks in the quarter?
Steve Fredrickson
Not during the quarter, no.
David Scharf
And lastly, I guess it's a broader question on the purchase volume outlook? It was a much, much stronger quarter of capital deployment, both here and abroad.
Would you characterize this as a little bit of front-end loading, or is your sense that the market is loosening up more and that 2016 may be shaping up to be an above-trend year for capital deployment?
Steve Fredrickson
Again, back to Tiku's commentary, especially in Europe, we see a lot of large transactions, almost regardless of the country that you are in, in Europe. So whether we are on the winning side by a few basis points or losing side by a few basis points, that will significantly alter how much capital we are able to put out in Europe.
Very strong pipeline in Europe, we believe throughout the year, at this point in time. Likewise we're seeing solid deal flow in the U.S., especially considering that we've got a number of large banks still out of the market.
Kevin made a specific comment about where we are seeing a pickup, although nothing that gets us back to past periods, but we are seeing a little bit of a pickup this quarter in the insolvency portfolio as well.
David Scharf
And I apologize, one last quick one, did you mention the size of the two Italian portfolios on a combined basis?
Steve Fredrickson
No.
David Scharf
Are you able to provide it?
Kevin Stevenson
Sure. They are about U.S.$50 million each.
Operator
And our next question comes from Bob Napoli of William Blair. Your line is open.
Bob Napoli
I guess the -- when we get the Q, and we look at the estimated total collections by pool, can you give us some feel for what we are going to see in markups and markdowns? And pools and trying to get to what we're looking at as far as total the IRRs you are generating versus your expectations across the board, where we might be a little light or where you continue to be ahead and where it's changed incrementally, quarter-over-quarter?
Kevin Stevenson
It's a big table, Bob -- I do have it in front me. Just roughly speaking, since most of the allowance charges were on 2012 and 2013, you are going to see 2012 go from a 277 multiple to a 276.
And you're going to see 2013 go from a 268 to a 266.
Bob Napoli
Okay.
Kevin Stevenson
Not a huge change, that 2013 BLO peaked at 269, back in Q3 of '15. Now it's 266 and 2012 deal looks like it peaked at 279, so not a lot of change in the deals from an ERC perspective.
Bob Napoli
Any other significant movements up or down around the material pools?
Steve Fredrickson
I'm sorry, what was that? I'm sorry, Bob.
Bob Napoli
What other material moves will we see when we look at the Q?
Steve Fredrickson
Yes, nothing I can see here. Nothing strikes me.
There's some move outs and there's some -- most of the others are move outs.
Bob Napoli
I guess then you bought a lot of paper this quarter, are these in line with average historical returns? Do you believe they're in line with or better than with all the volume coming out of Europe?
Are you possibly getting better returns than Europe? Just your confidence on the returns that you are getting on the paper that you are buying -- given some of the noise out there on the legal side…?
Kevin Stevenson
In the U.S., again, we made our commentary on pricing that we're observing. In Europe, I think that we're seeing a bit more of a steady state in terms of pricing.
Although the majority of the portfolios that we took down in Europe, at least by purchase price, we felt as though we had very strong insight to -- that we have a lot of experience with extremely similar paper. So we have a high confidence level in our underwriting.
Bob Napoli
Okay, the Italy portfolios -- when were they acquired? Were they part of the original Aktiv when you bought them?
Or was that -- when were they acquired?
Steve Fredrickson
One of them was acquired in late 2014. The earlier, second one was in early 2015.
Bob Napoli
Okay. Just on liquidity and available liquidity and funding, can maybe, Kevin, can you go over what you view as available liquidity that you have today to continue to make purchases or buy stock or whatever?
Make acquisitions?
Kevin Stevenson
Just roughly speaking, everybody on the call has a firm grasp of our pretty significant free cash flow. So we do a lot of this as free cash flow, but I assume you are talking about from a borrowing perspective.
Roughly speaking, you will see it when [indiscernible] comes out. We've got, call it, $10 million or $15 million of availability in our U.S.
facility, and in the 180 range of availability in Europe.
Bob Napoli
Okay. The bankruptcy rebound in the U.S.
is there something that's broken on the regulatory side there that's driven up the volume?
Kevin Stevenson
No, I don't think so.
Bob Napoli
Why do you think the volume has picked up? Somebody that wasn't selling just decided that it's okay to sell, or --?
Steve Fredrickson
From a relative basis, Bob, the numbers got down so low, we get lot of portfolio that comes in and it actually moves to needle. So, just some incremental portfolio getting sold -- we don't see any significant process logjam or change of seller perspective, at least at this point in time.
Bob Napoli
Any change on the competitive front, or is it primarily just seeing yourselves and Encore and a couple of smaller players?
Steve Fredrickson
In the U.S. core market, we don't see a change in the competitive front, we remains a very consolidated market.
Bob Napoli
And then last question, in interest expense, when you redid your deal, was there any over there -- the interest expense was a little bit higher than what we were looking for. I know the debt was a little higher too, but the rate looks slightly higher, more than the increase in December.
Are there any fees in there --?
Steve Fredrickson
Yes, there are. That was a very good observation.
We had about $1 million in there that was related to some swap expenses, a loss. There was also all the U.S.
deferred financing costs are now going through the interest line.
Bob Napoli
I'm sorry, which costs the U.S. deferred?
Steve Fredrickson
Deferred financing -- the capitalized deal cost that you're referring to…
Operator
Our next question comes from Leslie Vandegrift of Raymond James. Your line is open.
Robert Dodd
Hi, it's actually Robert Dodd. Just a quick follow up to that -- that swap cost is a one-time?
Obviously, I'll move them out, and then I've got a more detailed question about something else.
Kevin Stevenson
That is one, we do interest rate swaps over in Europe, so you might see those from time to time. We don't do any interest rate swaps here in the United States.
Robert Dodd
On the other question, I go back to the consent decree back in September if I remember right, at the time you, from my memory, indicated it wouldn't require any material changes in how you did business. Obviously the changes here, how the lawyers are going about doing business, would you say -- how would you rank your confidence that the law firms you work with aren't going to move the goal posts again, so to speak?
Steve Fredrickson
I think they have all gotten to a place where they are telling us they're comfortable and they feel good about the process changes that have been made. So could they move the goal posts again?
It's conceivable, but based on everything we're hearing back, it sounds like we are in a much more comfortable place than we were even in a couple of months back. The consent decree for Hanna and all the other changes that have gone on really got them very sharp and focused.
And they just wanted to be extra sure that all of these changes were made correctly, and from what I'm hearing, everything is on track or at least on the way to being back on track. I think the only thing that's out there is, in terms of uncertainty, is whether or not there will be more consolidation with the law firms.
There's been some of it already, and that trend could continue, and of course if that happens, there's not a disruption. But that's not altogether correlated to the consent decree there's a whole set of things that go into that.
Robert Dodd
Regarding the Vegas closing, I presume there will be some one-time expenses relating to that? You said the lease is up at the end of June.
Would those expenses be in Q2 or Q3?
Kevin Stevenson
Only if there are any, Robert, I would say most would be in Q2, but we'll let you know when those happen. I don't think there will be anything that you would want to put in your model.
Operator
Our next question comes from Mark Hughes of SunTrust. Your line is open.
Mark Hughes
Thank you. Good afternoon.
I'm sorry if I missed this earlier, how much revenue and cost impact do you think from the legal changes that you prescribed, Neal, you were just touching on? Best guess in the quarter?
Neal Stern
9 million or 10 million, something like that, it's really hard to pin this down, there's a lot of moving parts. We said the full impact from not having to spend the court costs would be a headwind of somewhere between $10 million to $20 million for the remainder of the year.
Mark Hughes
So the collections impact this quarter would have been 9 million to 10 million?
Neal Stern
Just on this one particular issue, on the legal side, yes. And just to be clear, that issue relates to lower legal spend in this quarter and in the prior couple.
There's a whole variety of things impacting legal cash collections. Outside of that legal cost issue, that's the one that I gave some specificity to.
Mark Hughes
Costs overall, when you--the adjusted costs were up a bit year-over-year, your collections and revenues were down. Kevin, what was your point about the cost structure, understanding some of these legal costs have had an impact, but is that a mix issue, what else is going on in the cost side?
Kevin Stevenson
There's a lot of things going on there. My point in the script was that it's not outside the average numbers you've seen through the past five Q1s.
But to your point, they're a little higher. So you've got things like legal costs down, you've got situations in Europe where you've got agency fees up, you've got a lot of things moving around in that.
That's the point I was trying to get across.
Mark Hughes
Okay. On the Americas core part of the business, are you seeing--you said solid deal flow in the U.S.
You said insolvency was up. On an underlying basis, is the core paper up in the U.S?
Steve Fredrickson
What do you mean on the underwriting basis?
Mark Hughes
On an underlying basis, the volume of paper, the volume of deals, underlying trend in charge offs--is supply up?
Steve Fredrickson
I think we see a fairly steady environment at this point.
Mark Hughes
Steady rather than up?
Steve Fredrickson
Yes.
Operator
And we have follow-up question from David Scharf of JMP Securities. Your line is open.
David Scharf
Thank you. I know this has been asked on prior calls.
Once again, reflecting on the complexity you face with so many currencies, and the fact that as you noted it's not just relative to the dollar, but it's relative to each other. Are there any other, or perhaps could you update us on the state of what hedging strategies are currently available to you?
And whether, based on your experience over the last year or so, whether you may actually be dialing back from some of those since there were some losses attributed to some? Or, just to give us a feel for, in your opinion, whether there is any way to moderate the FX volatility given just how many currencies you are dealing with?
Kevin Stevenson
Right, [indiscernible] some of the currencies that I watch on a quarterly basis, I'm obviously watching the pound and the dollar. The pound and the dollar, you tend to get impact in the balance sheet when we consolidate up into the United States.
I also watch pound to euro, because you've got some borrowing entity in euros that lend in pounds back to the subsidiary, so I watch what those rates look like. Of course I also watch euro to dollar, and then NOK to dollar.
Those are some of the things you can watch over time. You might even want to go back and grab some of those changes and then see how they relate to some of our FX impacts.
Specifically though, as far as our exchanging strategy goes, we generally try to borrow in the currency that has corresponding ERC in it. So if you look at all of Europe and take the ERC as an average in each one piece of the pie, we'll try to borrow in those currencies relative to those percentages.
It's an actual hedge. We also do some actual hedging with the banks for FX over in Europe.
It's not a tonne I would say there's 90 millionish of a noticeable amount of those. Is there more to that question now?
I kind of, lost track of the question.
David Scharf
Well, Kevin, it was a broader question just around given the complexity of so many currencies, and what you've learned over the course of the last year and a half, did you feel like there were strategies available to help moderate this degree of volatility? Is it just going to be a fact of life for operating in so many functional countries?
Kevin Stevenson
Remember these are non-cash charges. There's no -- really, this stuff's on paper so there's not -- if I actually enter into an FX hedge, as we like to read on various blogs, you're throwing real cash after [indiscernible] yourself.
We don't want to do that. To answer your question, I don't think there's anything shying us away.
We're not worried about any particular currency. As always, we're always looking for structure.
We're trying to figure out if there's a way to minimize some of this stuff, but so far you are seeing non-cash charges.
Operator
And we have a follow-up question from Bob Napoli of William Blair. Your line is open.
Bob Napoli
Just on the Europe core cash collections came in lighter than what we had modeled. Is that the Italy portfolios, or is there seasonality?
Is it the opposite seasonality of the U.S. with stronger cash collections in the first quarter?
A little color on that would be helpful.
Kevin Stevenson
The seasonality in Europe does not match the U.S. There's not a Q1 strength that we normally see in Europe.
Steve Fredrickson
I think the other piece of commentary we did provide was, as Kevin talked about, revenue recognition and this very large [indiscernible] deal that we did last year. That is a paying transaction with a low multiple, so if you're modeling that almost $200 million NSR purchase at a purchase price multiple that looks more like a standard one, your models may be over predicting there.
That for all intents and purposes, looks and models out a little bit more like an insolvency portfolio, both on the purchase price multiple and on the cost basis that you typically see in a NPL purchase.
Bob Napoli
Brazil, can you give us a feel for how much paper you are buying out of Brazil?
Darby Schoenfeld
Yes, we'll follow up on you on that one, Bob.
Bob Napoli
Last question, the DTP acquisition, what should -- do you expect that to be accretive initially? Or is it going to be neutral, and then you are going to use the assets there over time?
What's the -- what should we think about as far as affecting the balance sheet and P&L from that acquisition?
Kevin Stevenson
I think more than anything we are looking at it as a -- giving us a collection capability, given its size and given the basis on which we acquired it. You are not going to see a whole lot happening one way or another from an EPS effect.
Operator
I would now like to turn the conference over to Mr. Steve Fredrickson for closing remarks.
Steve Fredrickson
Thank you, Operator. Thank you all for joining us on this, our Q1 2016 earnings call.
We look forward to speaking with you all again next quarter.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may all disconnect.
Everyone have a great day.