Last year, Cabot Financial’s Irish office reported a setback in its grand plan to acquire non-performing loans (NPLs) all over Europe, after Covid-19 closed down deal opportunities for distressed debt sales and slowed down collections from borrowers in 2020. 

New financial information from two subsidiaries of the emerging Tallaght-based vulture fund, however, reveals that it has now restored its continental business to its pre-pandemic glory. Collections at Cabot Securitisation Europe, the firm’s main vehicle to acquire defaulted European consumer loans, collected €79.1 million from borrowers in Spain, France, Portugal and Poland.

“The growth in portfolio collections is primarily due to increased portfolio purchases in FY21 of €102.6m,” directors Sean Webb and Tom Dillon commented. The resumption in deals to acquire new distressed debt in those countries was “mainly due to [the] significant increase in opportunities in the European market for unsecured NPLs as the market was limited in FY20 due to the impact of [the] Covid-19 pandemic,” they added.

Meanwhile, a sister company called Cabot Asset Purchases (Ireland) has been growing a similar business in Italy, where it purchases distressed consumer loans through its local special-purpose vehicle TTI Italia SRL.

Accounts filed by TTI Italia show it held no substantial assets, instead transferring acquired loans to the Irish company. Cabot Asset Purchases (Ireland) owned €18.3 million worth of debt owed by Italian borrowers at the end of 2021, having grown this portfolio by nearly €7 million in 2020 and €9 million last year.

Cabot’s expanding Italian loan book delivered €3.7 million in collections last year, nearly triple the revenue generated in 2020. The two Irish companies combined collected €82.7 million in debt repayments from the five countries, having nearly made up for the drop in revenue they had experienced in the previous year, when they had failed to stem the churn of end-of-life loans with new ones to maintain their level of activity.

Continental portfolios now dwarf Cabot Financial Ireland’s business in the Republic, where it once took part in the post-financial crisis sell-off of bad loans by Irish banks. 

Cabot Financial Ireland, the group’s head company in Dublin and the one handling Irish assets, reported a slower increase in Irish collections to €16.8 million. “Portfolio collections in FY21 increased by 7 per cent versus FY20 as the adverse impact of [the] Covid-19 pandemic was less severe in FY21 and collections returned to more normalised levels,” directors reported. They did not expect significant changes to revenue from the further lifting of health restrictions since then.

This is reflected in the dwindling value of its Irish debt pile, from €38.5 million in 2020 to €33.9 million at the end of last year, as €2.3 million in new NPL acquisitions failed to make up for the repayment of older loans.

The valuation of Cabot’s loan books conducted at the end of the year was higher than the net effect of new acquisitions and depletion through collections. This signals an increasingly positive outlook in the forecast cash collections used by the firm to estimate the net present value of its portfolios.

Intercompany debt, profit and tax

In addition to the €304 million of European distressed consumer debt it has purchased and manages itself, Cabot Securitisation Europe has extended another €369 million in loans to other group companies. Although its intercompany debtors are not detailed, they are likely to include its own loan and property management subsidiaries in Luxembourg, Spain and Portugal.

Cabot Securitisation Europe is funded through €593.6 million in profit-participating loans advanced by its sister company Cabot Asset Purchases (Ireland), which in turn owes €543.8 million to other undisclosed group companies at an average interest rate of 4.9 per cent last year.

This arrangement allowed Cabot Securitisation Europe, a so-called section 110 company, to declare its €26.3 million profit last year as interest paid to its Irish sister and pay just €13,000 in corporation tax at the higher rate of 25 per cent applicable to investment income.

Cabot Asset Purchases (Ireland) then reduced its taxable profit by the €6.6 million it paid in fixed interest to other group companies, ending the year with a pre-tax profit of €21.6 million. On this sum, it paid €2.7 million in Irish corporation tax at the standard 12.5 per cent rate.

Their immediate parent Cabot Financial (Ireland), in addition to its Irish NPL business similarly funded through intercompany debt, has revenue from software and debt servicing it supplies to the wider group in Ireland – but it also bears the cost of its 132 employees in Tallaght. Its resulting pre-tax profit was just €665,137, down from €1.7 million in 2020. This left it with a tax bill of just €165,000.

A third subsidiary, Cabot Financial (Treasury) Ireland, acts as a clearing house for over €600 million of intercompany debt owed by and to undisclosed group entities. It is likely that it channels intercompany debt to Cabot Asset Purchases (Ireland) but this is not reported. It surfaced €3.7 million in profit last year and paid just under half a million euro in corporation tax. Meanwhile, €24.7 million left that company in the form of interest, at an average rate of 7.31 per cent last year, paid to other group companies apparently outside the country.

In total, Cabot’s Irish companies paid €3.3 million in corporation tax in 2021 – a ten-fold increase on the previous year – out of combined pre-tax profits of €26 million, in line with the standard 12.5 per cent rate. This, however, does not include any gains paid out to overseas group entities in the form of interest. 

The Irish companies are part of the UK-based Cabot group, which in turn is part of the US-listed Encore Capital Group. Encore’s accounts show that Cabot purchased the equivalent of €225 million worth of new distressed loans across Europe last year, which means the €111.8 million reported by the two Irish companies targeting continental Europe accounted for nearly half of this expansion. (Cabot’s British units handle UK debt locally.)

In collection terms, Cabot generated over €565 million in revenue from European borrowers last year. By this metric, the continental portfolios held by its Tallaght office made a smaller contribution of around 15 per cent last year. This suggests that Cabot’s more established UK business holds a larger historic debt pile to work through, but the role of its Irish-based EU operation is playing an increasing role.

While the UK has provided “a relatively consistent pipeline of opportunities over the past few years” for Cabot, Encore delivered a more volatile outlook for EU markets in its latest quarterly results last month:

“The Spanish debt market continues to be one of the largest in Europe with significant debt sales activity, and an expectation of a significant amount of debt to be sold and serviced in the future. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should continue to provide debt purchasing opportunities in Spain.

“Banks decreased portfolio sales at the beginning of the Covid-19 pandemic in order to focus on customers’ needs. While we have seen a resumption of sales activity across many of our European markets, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter as banks seek to re-establish a more stable debt sales strategy. In general, supply remains below pre-pandemic levels while portfolio pricing has become more competitive across our European footprint.”

Both Cabot's Irish vehicles for EU continental loan book purchases, meanwhile, reported that they would "continue to look for opportunities" in this market.