Collection House Limited: Credit Corp (ASX:CCP) shares end the short week on a high, here's why

SummaryCredit Corp Group signed a binding contract to acquire Collection House Group's Purchased Debt Ledger book for ~A$160 million.The consideration is contingent on adjustments; net outlay to be ~A$150 million.The transaction would support Collection House in eliminating the risk of additional correction to the accounting value of its PDL assets.The Company can now focus on delivering an improved standard of collection services to its clients.Credit Corp Group Limited (ASX:CCP) has signed a binding contract to acquire the Australian Purchased Debt Ledger book of Collection House Group Limited (ASX:CLH) for ~A$160 million. Following the announcement, the shares of CCP rose significantly, ending the day's trading session at A$29.760, up 19.662% from its previous close. The Company has a market capitalisation of A$1.67 billion.The agreement with CLH also has a provision of a short-term loan of A$15 million. These A$15 million short-term is projected to get repaid entirely within nine months. This loan is secured against the tax receivables of Collection House Group. The total consideration depends on adjustments. The net outlay is likely to be ~A$150 million. The transaction would conclude by 31 December 2020.Terms and Conditions of the transactionAs per the terms of the agreement, Collection House Group holds eligibility for receiving a part of the cumulative collections beyond the level needed to attain CCP's hurdle investment return.The book being acquired comprise of continuing payment arrangements with a total face value of A$200 million.The acquisition would be made using cash available with the Company, and there would not be a need to draw on its currently unused A$375 million of funding lines.Collection House's Background to the Recapitalisation ProcessCollection House Limited started its recapitalisation process in early 2020 as a part of its strategic review. Apart from reviewing the operating model and collection strategies, the Strategic Review recognised the requirement to write-down the value of purchased debt ledger of Collection House.The write-down process took the impact of the net present value of the adjusted cash collection profile from implementing more customer-focused collection plans in the CLH's purchased debt ledger business, especially, lesser dependence on legal activity.The drop in the carrying value of the purchased debt ledger (PDL) assets caused violations to specific financial covenants as per the Company's lending arrangements. These facilities increased with time as Collection House purchased new debts during several successive periods of elevated competition for PDL assets. CLH chose to fund these acquisitions via debt. These debts' maturity was mismatched to the longer-term period of the cash flow from its core PDL assets.Because of these reasons, Collection House decided to restructure its current borrowing agreements and restructure the business for longer-term success.The transaction was the focus area for CLH during the considerably long time of suspension in trading.How would Collection House benefit from this transaction?Through this transaction, the Company would be able to eliminate the risk of additional correction to the accounting value of its PDL assets. It would also help lower debt level and a simplified business model.CLH would be able to focus on delivering an improved standard of collection services to the clients via a value-aligned, client-centric collections methodology. It forms an essential component in addressing short-term volatility in the credit sector.Through this transaction, CLH would have a capital-light, high ROE servicing mode. CLH believes that it would create a more sustainable and predictable shareholder value with time.Where would Collection House use the proceeds?As pointed above, Collection House would dispose of its certain PDL assets to Credit Corp Group for ~A$160 million. Above that, CLH might also get another A$15 million (maximum value) over an eight-year period that would rely on the Sale Assets' future performance.The proceeds through this transaction would help Collection House Group to reduce its senior debt. The existing lenders of CLH have agreed to provide a three-year senior debt on commercial terms of ~A$45 million.The A$15 million would support the business in short-term general corporate reasons. The settlement of the transaction would happen in the next four days.