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Encore Capital Group Inc (ECPG) Q4 2020 Earnings Call Transcript

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Encore Capital Group Inc (NASDAQ: ECPG)
Q4 2020 Earnings Call
Feb 24, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Encore Capital Group's Q4, 2020 Earnings Conference Call.[Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Bruce Thomas, Vice President of Investor Relations. You may go ahead, sir.

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Bruce Thomas -- Vice President of Investor Relations

Thank you, Operator. Good afternoon, and welcome to Encore Capital Group's fourth quarter 2020 earnings call. Joining me on the call today, are, Ashish Masih, our President and Chief Executive Officer; Jonathan Clark, Executive Vice President and Chief Financial Officer; Ryan Bell, President of Midland Credit Management; and Craig Buick, CEO of Cabot Credit Management. Ashish and Jon will make prepared remarks today, and then we'll be happy to take your questions. Unless otherwise noted, comparisons made on this conference call will be between the fourth quarter of 2020 and the fourth quarter of 2019, or between the full year 2020 and the full year 2019.

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. Please note, at the conclusion of today's call, we will post our annual report to our website, which includes among other items, a letter to shareholders and a copy of our Form 10-K.

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. As always, a primary goal of these earnings call is to help you understand how we look at our business and what metrics we track to measure our performance. I will start with a high level recap of 2020, including our achievements. Then I'll review our strategy, as well as key measures that are important indicators of the strength of our business. Next, Jon will reveal financial results, after which I'll comment on our priorities for 2021 and beyond. Importantly at the conclusion of today's call, we will also post to our website our first ever annual report. It includes, among other items, a letter to shareholders, which provides me an opportunity to share my vision for Encore with you. We will begin with a look back at our performance in 2020. 2020 was an unprecedented year for Encore, as we continue to execute on our strategy, delivered strong financial results and reached several milestones despite the impact of the COVID-19 pandemic. When the pandemic was in its early stages, our prior investments in technology and compliance enabled us to quickly provide safe working conditions for our colleagues, and maintain full operational capability.

For consumers, financial hardship became more prevalent as a result of the pandemic, which for us meant that we would increasingly be called upon to do precisely what we do every day, engage in honest, empathetic and respectful conversations with consumers to help them resolve their debts. For the year, we delivered strong returns while achieving new highs for cash generation, collections, revenues and earnings. Our portfolio purchases in 2020 were limited by the amount of supply available in our key markets. Though the deals we did win had strong purchase price multiples and returns, the result of our disciplined approach to deploying capital.

We implemented a new unified global funding structure in 2020 by combining the balance sheets of our two largest businesses. This transformation provided Encore with one of the strongest and most flexible balance sheets in our industry. Particularly, as we continue to reduce our leverage, which was down from 2.7 times to 2.4 times by year-end. Our core business is relatively straightforward, we look to purchase portfolios of non-performing loans and attractive cash returns, using funding with the lowest cost available to us. For each portfolio we own, we strive to meet or exceed our collection expectations, while ensuring the highest level of compliance and consumer focus, as well as maintaining an efficient cost structure. We achieve these objectives by maintaining focus on our pillar strategy. Our strategy not only enabled us to deliver outstanding financial performance in 2020, it has also positioned us well to capitalize on future opportunities and is instrumental in building long-term shareholder value. The first pillar of our strategy, market focus, leads us to concentrate our efforts on our most valuable markets with the highest risk adjusted returns. We target markets that have a large and consistent flow of purchasing opportunities, a strong regulatory framework that creates advantages for firms with sufficient financial and operational capabilities, a high degree of sophistication and data availability, and stable long-term returns.

As a result, we focus more on the U.S. and the UK, which are markets that meet all these criteria. We are also strengthening our presence in markets we believe, can become more important for us over time, such as Spain, France, Portugal and Ireland. As a result of our focus on our most valuable markets, we thrive on recurring portfolio sales through the credit cycle, and a success does not rely on large macro events that cause surges in NPL supply. The U.S. is the largest and most valuable market, where we continue to improve our operating leverage in 2020. We accomplished this by growing collections to a record level, while reducing our cost to our operational innovation and increased productivity. We also continue to drive a higher proportion of collections through our cost efficient call center and digital channel. At the same time, although the impacts of the pandemic have limited the availability of portfolio supply, particularly later in the year, we deployed capital at the highest purchase multiples we have seen in years.

Due to COVID-related operational constraints, MCMs expenses in 2020 were lower than we would have incurred otherwise. These constraints have now largely diminished, and spending levels have normalized. Due to our expertise and compliance and risk management, as well as the time we've had to prepare, we are well-positioned to implement the long awaited industry rules announced by the CFPB, which will become effective in November, 2021. For the full year in the U.S., we delivered collections that were 106% of the 2019 year-end ERC forecast. Turning now to our business in the UK and Europe. Our focus on operating efficiency and expense management in 2020 enabled us to deliver continued solid profitability, despite the pressure on European economies caused by the pandemic. After enduring a particularly challenging first half of the year, our collections performance in Europe improved substantially through the remainder of 2020, as Cabot began to resume more normal collection activity. We finished the year with collections totaling 88% of 2019 year-end and ERC forecast. The pandemic cause UK banks to pause much of their portfolio sales during the year, which impacted Cabot's portfolio purchases.

Looking forward, our new global funding structure removes the prior constraints related to Cabot stand-alone leverage, and thus provides us an enhanced stability to deploy capital at attractive returns, as purchasing opportunities pick up again. The second pillar of our strategy focuses on enhancing our competitive advantages in our core markets. Encore's foundation is comprised of certain key competencies, our data analytics capabilities allow us to accurately price risk and optimize collections to maximize financial returns. We excel at operating in highly regulated environments, but compliance is embedded in everything we do. We treat each consumer with fairness and respect on their path to financial recovery. In addition, we take pride in our operating efficiency, supported by our scale, low cost platform, and investments in digital technology. Our competitive platform has enabled a track record of delivering strong earnings, which continued in 2020, and we expect will continue in 2021, as well. For the year, we grew GAAP net income by 26% compared to 2019. Despite the impact of $40 million of expenses after tax related to the implementation of our new global funding structure, and subsequent refinancing activities.

Our competitive platform also enables us to generate a significant amount of consistent cash flow. Our cash generation and 2020 increased 6% compared to 2019, reflecting the steady improvement in our business, the efficiency of our operations and the resilience of our portfolios. Our consistent growth in cash generation has contributed to a reduction in our borrowings and the deleveraging of our balance sheet. Our strong cash generation also provides us with additional flexibility, when we consider our capital allocation priorities, which include portfolio purchases at attractive returns, strategic and disciplined M&A, and share repurchases. Our competitive advantages also allow us to deliver differentiated returns. For some time now, we have highlighted our return performance in the form of return on average equity. And we compare well to rest of our peer group on this measure. We would also like to emphasize an additional metric that we track, return on invested capital. By its nature, ROIC ultimately takes into account both the performance of our collections operation, as well as our ability to appropriately price risk and investor capital. We believe that it's important to show that our underlying business delivers strong, stable returns that we can maintain through the credit cycle.

ROIC can be calculated in several ways, but the metric we will be providing from this point forward will be adjusted for non-operating impacts that might otherwise distort our underlying results. Furthermore, because we operate in a number of different tax jurisdictions, our tax provisions sometimes introduces volatility into the accounting for our business. We have therefore chosen to provide a pre-tax measure of ROIC, which we believe more accurately reflects the stability of our underlying business. Our ROIC performance over the last three years is a solid indicator of improvements in our business, and our ability to deliver strong returns under current market conditions, as well as over time. We believe you will find it difficult to find such attractive returns at other companies in or around our industry. ROIC is useful as a stand-alone measure of performance for an operating and investing business, such as Encore. It is also a helpful metric when used in comparison to a weighted average cost of debt on a relative basis. We believe our strong operating performance and balance sheet together create value.

In simple terms, we create increased value as a spread between our returns and our cost of debt expense. The third pillar of our strategy with the strengthening of a balance sheet of constant priority. We believe that a strong balance sheet is critical to being successful in our sector. While operating in a very challenging environment, our continued focus on further strengthening our balance sheet in 2020 enabled us to reduce our leverage ratio from 2.7 times to 2.4 times, which is comfortably within the targeted range of two to three times. We also successfully executed a plan to combine the balance sheets of our two largest businesses to form a unified global funding structure. Consequently, we believe we have established a best in class capital structure in terms of cost, liquidity, tenure, diversification of capital sources, and overall flexibility. This will allow us to capitalize on opportunities that will come in 2021 and beyond.

I'd now like to hand the call over to Jon for a more detailed look at our financial results.

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Thank you, Ashish. Before I begin, I'd like to provide an update on our efforts to further simplify our messaging and provide more clarity to the investment community. Going forward, we will be reducing the number of metrics we use to convey our earnings performance. Beginning with the first quarter of 2021, we will discontinue providing adjusted net income and economic EPS. By fully anchoring our earnings messaging to GAAP net income and GAAP EPS, we hope to eliminate any confusion about the strength of our earnings power. Deployments were $660 million in 2020, compared to $1 billion in 2019. Importantly, for the portfolios we did buy, our initial weighted average purchase price multiple was 2.5 times, which is the strongest multiple we've seen in years. This reflects our purchasing discipline, ability to maximize collections and our focus on returns.

The year-over-year decline in purchasing volume was caused by a lower supply of NPL portfolios available for purchase. This was a direct result of the impact of the COVID-19 pandemic, which led to reduce consumer delinquencies and charge-off rates. The purchasing decline was more pronounced in the UK than in the U.S. However, we continue to expect both markets will ultimately see delinquencies and charge-off rates increase over time, leading to increased opportunities for us to purchase NPL portfolios at attractive returns. Collections were record $2.11 billion in 2020, up 4% compared to the prior year. MCM collections grew 16% in 2020 to record $1.53 billion, within that total MCM's call center and digital collections grew 27% compared to the prior year. Cabot's collections who are debt purchasing business in Europe in 2020 were $554 million, down 13% compared to the prior year. The majority of the decline occurred in the second quarter of 2020, after which collection trends improved through the end of the year. Despite the COVID pandemic, Encore's global collections in 2020 achieved 100% of our ERC forecast for 2020. Revenues in 2020 were up 7% to $1.5 billion, compared to $1.4 billion in the prior year. In the U.S. revenues were up 21% to $993 million in 2020. In Europe 2020 revenues were down 6% to $490 million.

Our new global funding structure which we implemented in September of 2020, provided our business with important benefits, soon after we put it into place. In the fourth quarter, we took advantage of favorable market conditions and refinanced $840 million of senior secured notes, reducing our interest expense and pushing out maturities. In addition to reducing our cost of funds and extending maturities, our new funding structure enhances our access to capital markets, and makes it easier for us to allocate capital to the markets with the best risk adjusted returns. As a result of our new funding structure and the strengthening of our balance sheet over the past three years, we have put ourselves in a strong position to capitalize on the attractive opportunities that lie ahead. Over this time, we have reduced our debt to equity ratio from 4.3 times to 2.7 times. And we've also reduced our ratio of net debt to adjusted EBITDA, a measure common in our industry. We have reduced this ratio from 2.8 times to 2.4 times, resulting in a level that is among the lowest in our peer group. Encore's leverage reduction has been driven by strong operating performance and focused capital deployment, which have in turn driven higher levels of efficiency and cash flow.

Our new global funding structure provides many benefits to Encore, including the diversity of our funding sources. We now have access to more sources of capital than ever to optimize our debt stack over time. I believe the importance of financial flexibility and access to a variety of capital sources cannot be overstated in a business like ours. With this flexibility, we are well prepared for the opportunities that lie ahead.

With that, I'd like to turn it back over to Ashish.

Ashish Masih -- President and Chief Executive Officer

Thank you, Jon. As we look ahead to 2021 and beyond, I'm excited about our market position and future prospects. In terms of supply, we anticipate an eventual increase in purchasing opportunities in the U.S., the UK and in Europe, as charge-offs are expected to rise meaningfully. Consistent with a long-term view, we believe our strategy will continue to be instrumental in driving strong results and building shareholder value. With regard to operating and financial performance, our focus is to deliver strong ROIC through the credit cycle. With regard to our balance sheet, our objectives include preserving our financial flexibility, targeting leverage in the range between 2 and 3 times, and maintaining a strong BB debt rating. Our capital allocation priorities are, portfolio purchases at attractive returns, strategic and disciplined M&A, and share repurchases. I'm excited about our business in 2021, as we continue to operate at a high level, with a solid liquidity position and a strong, flexible balance sheet, which will allow us to capitalize on the many opportunities ahead.

Now we'd be happy to answer any questions that you may have. Operator, please open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Bob Napoli of William Blair. Your line is open.

Bob Napoli -- William Blair -- Analyst

Thank you. And nice job on the year, in a pretty, pretty unique year, I guess. Ashish, you've got up the balance sheet that seems to be where you want it. And you brought up M&A and share repurchases, I think that's the first time I've heard that from Encore NOI. What are you -- and assuming that the purchase opportunities have remained relatively low for a couple quarters, are you looking to deploy capital? And what would you look, be interested in from an M&A perspective? And are you looking to start returning capital through share repurchases in 2021?

Ashish Masih -- President and Chief Executive Officer

Hi, Bob. Thanks for the question. Yes, we have been very focused on strengthening our balance sheet. And as we've now laid out our target leverage range, we're kind of on a slightly below the midpoint of that range. So that's where we're at right now. And we continue to trend, so it's been a long-term trend, multiyear trend that's been happening. And M&A opportunities is -- portfolio purchasing is the first one, and M&A is kind of opportunistic or in the markets that we would find that we may run into opportunities. We will be very disciplined and strategic about it. And in the past, where we've done some of the larger M&A whether it was asset acceptance, or the Atlantic credit, both brought very good back books where we performed really well, and capabilities as well and some of the larger ones in Europe. So those are the ones that have occasionally come through, and have been very meaningful to Encore.

And you're right, as we clearly laid out, the third priority on that list is share repurchases. So, that would be something that we are always discuss and actively consider. And now we have laid out a very clear priorities, as well as the balance sheet priorities that we will be weighing those against and looking at the year as it unfolds, in terms of, especially in terms of purchasing opportunities, capital deployment opportunities.

Bob Napoli -- William Blair -- Analyst

Thank you. And I heard you I mean, obviously, you got some good prices early in the year, especially on your debt buys. But now that the supply of debt and I think the confidence probably of lenders has increased. Has the competition for portfolios gone up by you have returns that at least in the current environment, come down materially? Are they at levels that you're happy with?

Ashish Masih -- President and Chief Executive Officer

So, if you look at our 2020 financials we had -- yes, we bought less, but we bought at one of the best multiples in years. And remember, the multiple is worth much more now than two years ago, because our cost to collect is much lower. So the actual cash returns are very strong. Now, as the supply has decreased, and by the way, in U.S., all the issuers who sell are still selling. It's just the volumes are on the lower end of the range in the contract. And there are forward close as well, that lasts a long time in some cases. But yes, the pricing on some of the new purchasing that's happening in the U.S. has picked up slightly compared to let's say, in the middle of the year, last year, but not anything materially so at this point. And we are forward close locked in and we continue to stay very disciplined in terms of returns, where we deploy our capital.

Bob Napoli -- William Blair -- Analyst

Thank you. And last question, what are you watching on the regulatory front with the changeover in the administration? CFPB seems to be getting more active. And is there anything that you're concerned about right now on the regulatory front?

Ashish Masih -- President and Chief Executive Officer

Nothing in particular, except there's a constant change in the financial services space. So, we are well used to regulation and in so many ways, a well regulated industry. We really appreciate that. It creates barriers of if you would for players who might just not be doing the best things for their consumers. So, we work with regulations really well. That's number one. The other one is the issuer expectations are also very important in our industry. So they come in audit us, and certify debt buyers. So at times their expectations are even higher than what the regulations might be. So we're very well used to it. As you know, there are CFPB rules got finalized, and they should go into effect in November 2021. And we are well on our way to prepare for those without any incremental expenses and effort, because we are used to implementing changes in state and other regulations.

Now, multiple agencies at the Federal government level are going through their own changes and leadership and whatnot, which is normal part of the process. And we have had regulations in our industry through both parties in different parts of the government over time, and we are very kind of used to and adapt well with those changes. At this point, we're just watching and if anything changes we'll adapt, and we would very much welcome those regulations in so many ways. Well-regulated industry with transparency and focus on consumer as our friend both in U.S. as well as in the Europe and particularly in the UK.

Bob Napoli -- William Blair -- Analyst

Thank you. Appreciated it.

Ashish Masih -- President and Chief Executive Officer

Sure.

Operator

Your next question is from David Scharf of JMP Securities. Your line is open.

David Scharf -- JMP Securities -- Analyst

Good afternoon, and thanks for taking my questions. And echo Bob, congrats on navigating through an unusual and challenging year, unlike any other. Maybe two questions, Ashish. The first, just to clarify, I guess, switching to the expense side of the equation for a moment. I thought I heard in the commentary you referenced that by the end of 2020, you were back to a more normalized level of spending, off of the unusual trough during the early stages of COVID, in a particular focusing on the legal collection costs, which bounce back a lot in the third quarter and came in at $75 million in the fourth quarter. Is this a good quarterly run rate for legal, as we think about the current year, because with courts open and so forth?

Ashish Masih -- President and Chief Executive Officer

Hi, David. Thanks for your comments earlier. Appreciate it. In terms of expenses, yes, you heard correctly. Q2, Q3 were unusual, there were constraints on legal specially and just broadly on expenses. Q4 was getting much more normalized. So I would say on legal, yes. But actually, even more broadly, if you look at our total expense number for Q4, and that is a fairly good normal expense number from a quarterly point of view.

David Scharf -- JMP Securities -- Analyst

Got it. No, that's very helpful. And then maybe just on the overall demand environment, obviously your comments don't come as a surprise. They echo pretty much what we've heard from every consumer lender during this reporting season in terms of loan demand. But I'm wondering, as we think about another third wave of Federal stimulus or aid coming in the next month or so, and the experience of how that helped impact household savings and deleveraging and the like. To the extent that an eventual recovery in losses takes longer to materialize than anticipated.

Are there other asset classes, consumer lending asset classes or geographies that you may look to pivot to? You know, I saw on the slides there was a little mention of Portugal, Spain maybe reengaging in some other countries. Also kind of wondering if in the U.S. auto deficiency installment loans, personal loans, if there are other potential areas to fill some of the demand pressures on the credit card front?

Ashish Masih -- President and Chief Executive Officer

Yes, that's a very good question, David, in terms of how we constantly think about other opportunities. So we've been quite disciplined in kind of spending most of our deployable capital in markets that are good. But as you correctly noticed, there are other markets, we have operations. We have operations in Ireland, Spain, France and Portugal. And some of those markets, the supply has been also built up from prior years and continues to be quite robust in some ways. So given our global ability now in terms of access to capital, there are no constraints on Cabot's stand-alone leverage that it used to have in the past. We have much more flexibility in going to the markets where the best returns are. And we are focusing on some of these other markets to build up scale, further scale in certain those countries in our platform. So, it opens up opportunities definitely to be more flexible and deploying capital around the world, as we've done.

We also have a few investments in some of the other countries where we don't have a platform but more R&D investments. As we learn from those, we will be quite nimble and adapt to opportunities that would come. And on your other point on U.S., those are some things we continue to think about and look at. And we watch our other asset classes, as the banks may start thinking about how to deal with losses and different asset classes as they increase. So, those are things we continue to think about from a strategy perspective. But we do have platforms that have no constraints now in terms of ability to deploy there that we previously used to have. So, we feel we're in a pretty good place that way. And we'll stay disciplined and focus on returns. And of course, deployment is important. But it's kind of a combination of the two that we would be looking at.

David Scharf -- JMP Securities -- Analyst

Got it. Thank you.

Operator

Your next question is from Mark Hughes of Truist. Your line is now open.

Mark Hughes -- Truist -- Analyst

Thank you. Good afternoon. The seasonality in collections historically have had a strong Q1 with the government relief and COVID impact. I wonder whether you have any different view about how we should think about seasonality in the business.

Ashish Masih -- President and Chief Executive Officer

The seasonality, Mark, has typically been a U.S. saying on tax returns. So, when tax refunds come, I think they're starting to go through now, I would imagine. But as you know, the last year has been anything but normal in terms of consumer behavior. So, there's been situations which even banks and credit card issuers have been scratching their heads on. When economic downturn happened, certain expectations were there, it didn't happen. So, I would say yes, tax refunds will probably be there as before. But there's other factors that are at play, whether it's stimulus or just how the economy opens up in different parts of the country in terms of job growth, so that might confound and kind of create kind of different behaviors and different outcomes. But just as tax oriented seasonality that should still be there, but it may be layered on with other factors, I would imagine this year, and we'll be watching it as our banks and credit card issuers.

Ryan, would you like to go into more detail? Can you just touch on kind of what you're seeing right now?

Ryan Bell -- President, Midland Credit Management, Inc.

Yes. From an overall seasonality standpoint in the U.S. to the exact question, Q1 and Q2 are usually our strongest quarters from a collection standpoint. Q4 is usually our worse. And there's probably no reasonably that trend varies a ton this year.

Mark Hughes -- Truist -- Analyst

Thank you for that. And then Jonathan, when we think about I think you point to the GAAP net income as your bogey, what you're going to be talking about on a go forward basis? Refresh me the $6.68, I'm looking at Slide 10, does that include the financing impacts?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Sorry, I'm pulling up Slide 10.

Mark Hughes -- Truist -- Analyst

Yes. The incremental expense.

Ashish Masih -- President and Chief Executive Officer

Mark, we point to $6.68, right.

Mark Hughes -- Truist -- Analyst

Correct. That's right.

Jonathan Clark -- Executive Vice President and Chief Financial Officer

So that, yes, that's GAAP net income. So, I'm sorry. So what's your question? What whether it's include --

Mark Hughes -- Truist -- Analyst

The question is, I think you highlighted the idea that on a go forward basis, you'll focus on net income GAAP net income numbers. Is the $6.68, that kind of the base that one would start to think about forward projections?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

I see what you're talking about. Well, if you were to -- I guess you're getting at a run rate question. Ashish, would you like to cover this? Or do you want me to address the run rate?

Ashish Masih -- President and Chief Executive Officer

Go ahead, Jon.

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Yes. In terms of run rate, the way we look at Q4, just to level set everybody as, I think we and you may have asked a question Mark, one of you guys did last quarter about what we expected the run rate was. And we backed out some unusual items and got to a run rate of a $1.90. And in fact, this past quarter, if you adjust for one-time items, you're at $1.96.

Now going forward, and when you think about it purely in terms of EPS, you can take your -- I would go back to starting at where it would be for the year. So the $6.68. And then when you think about what you might add back to that, you have a $1.26 for financing charges due to the multitude of refinancings that we did and restructuring. And then of course, you had the charge from the CFPB. And that rolls up to a $1.73 in total, which gets you to $8.41. And I think in that range of $8.40 to $8.50 is a reasonable run rate.

Mark Hughes -- Truist -- Analyst

And that would presumably include this higher level of expenses in the fourth quarter? Is that fair, because the $1.96 included that higher level?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Yes. I think just for a high level, it's good just to, we look at it from the entirety of the year. So where you started was, I would argue, is at the right place, you start from the $6.68, you add $1.73, we get $8.41. The $8.40-$8.50 kind of place is a reasonable place to start in terms of what the run rate has been for 2020.

Mark Hughes -- Truist -- Analyst

That is --

Bruce Thomas -- Vice President of Investor Relations

So to be clear, Mark, the answer to your original question was does the $6.68 include the impact of the $1.26? Then, yes, it does.

Mark Hughes -- Truist -- Analyst

Yes. I follow you. Thank you for the detail. The one of the things that Ashish, you suggested that you think the prospects are still there for supply to increase in coming periods. And I think I'm familiar with some of the general outlines there that we're still at a somewhat elevated unemployment rate, want to take some of these government supports away, and the moratorium, things like that, then there may be more impact on the consumer. Anything else you see, when you're dealing with the banks, or elsewhere, that informs that view about more supply possibly coming?

Ashish Masih -- President and Chief Executive Officer

Yes, Mark. So let me just elaborate on that for U.S., and I'll let Craig chime in after that on UK. It has a bit of a unique government set of programs. On U.S., I think, it's been very unexpected, unusual rather behavior from consumers. So hard to speculate, we are following banks and issuers earnings reports, and also hearing directly from them. And most of them have kept their allowances pretty high, not released them. So what we hear is pretty similar to what they're saying publicly. And a couple of them said they expect losses to rise in the second half of 2021. And a few others have said it's going to come in 2022, and still holding their allowances. So I think there's just so much kind of unusual behavior in terms of whether it's government policy or consumer behavior, and as vaccinations go forward, the economy may open up in different parts of the country. Net-net, that's what we are hearing.

When we will stay nimble and flexible, as you know, in U.S. all the players who sell are still selling, and they are largely setting to forward close. Some can continue for quite a while which is good, and will stay focused on ensuring they're ready to capitalize they have ample liquidity and capacity from an operations point of view as and when their losses may rise, perhaps toward the end of the year, perhaps more so toward early '22. I'm going to let Craig provide a bit of color as government programs are a bit different in UK kind of what's happening there. Although the similar outcome in some ways.

Craig Buick -- Chief Executive Officer of Cabot Credit Management

Yes. Thanks, Ashish. You're right, Mark. In terms of supply pace, we are seeing supply lower than we'd normally expected, at this particular point, driven by the fact that those delinquencies in the banks are quite low as you point out. Although UK banks have reported in the last number of days and similar messages in terms of delinquencies running at historical low levels. But I think it's important that you look through the banks reporting and understand the current macro-economic situation, particularly here in the UK. Even though delinquency is low, history tells us that delinquencies and charge-offs are closely correlated to unemployment.

In the UK, the employment rate just took over 5%, after holding around 4% for like five years or so. So in UK, that's 1.7 million people who are currently unemployed as at the end of December. Now interestingly, it was noted a reference by someone from the Office of National Statistics earlier this week indicate, that there are currently around 6 million people in the UK who are currently furlough. Now this format of support for individuals, is where the UK and the U.S. government support measures, different quite significantly. In the U.S., the government has provided stimulus checks to all individuals at certain point in time, regardless of their employment status. That's a one-time payment to everybody in the country.

In the UK, the government is instead effectively paying the wages of all of those who cannot afford to work or cannot work for months on end. So it's not just a one-time payment, they're paying monthly the wages of those employees. And that's what furlough is in the UK. It was a scheme that was put in place as the pandemic unfolded, and the government has started that we'll continue to be provided at least until the end of April this year. So this scheme has effectively suppressed the UK unemployment rate, as those people receiving furlough, those six million people are not classified as unemployed and they do receive a large portion of their normal wages directly from the government. So as a result, the delinquency rates we see today in the UK are suppressed compared to what they might have otherwise been, if not for this government support. When the scheme is unwound, the general consensus view is that we will see a rise in unemployment, and this leads us to believe that there will be an increase in opportunities at attractive returns as charge-offs are expected to rise meaningfully after the impact of those government support measures are unwound. I trust that makes sense, Mark.

Mark Hughes -- Truist -- Analyst

It does. That's great detail and appreciate that. Thank you very much.

Operator

Your next question is from Mike Grondahl of Northland Securities. Your line is now open.

Mike Grondahl -- Northland Securities -- Analyst

Hey, thanks, guys, and congratulations. So with the debt refinancing, is there any debt still to be refinanced? Can you kind of speak to that?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Sure. Hi, Mike, this is Jon. We've got the bonds that I refer to as the legacy Cabot bonds that we've been refinancing. We've refinanced at one point half of one bond. So the other half still is outstanding. And at current exchange rates, that's a little over $300 million of outstanding. That reaches at the end of the year, the redemption price equals par.

Mike Grondahl -- Northland Securities -- Analyst

At the end of 2021?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Yes, actually in October, toward the end of the year.

Mike Grondahl -- Northland Securities -- Analyst

Sure. And so there's $300 million remaining that you guys think you can kind of go out and tackle. With the debt you refinanced already, what's a rough estimate of the annual savings interest expense?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Yes, probably the best way to look at it, Mike, is just comparing current year on a quarterly basis to next year. I mean 2020 to 2021. If you look at 2020, you'll notice that we averaged between 50 and 55 in a given quarter. So let's call it a little over 50. In go-forward, we should be around 45, based on what we see in terms of our deployments and debt levels, etc. And a good part of that is tied to -- that reduction is tied to the refinancings we've done.

Mike Grondahl -- Northland Securities -- Analyst

Got it. And just speaking back to earnings and you guys kind of speak in the GAAP going forward, how do you guys feel about delivering earnings growth in 2021?

Ashish Masih -- President and Chief Executive Officer

Mike, this is Ashish. We feel very good. I mean, we have been delivering earnings growth, while deleveraging the company, strengthening the balance sheet. And that's coming from deploying at good returns, improving our cost to collect, reducing interest expense now. So all of those things have been improving going forward. So I feel good about 2021, as we look at 2020, and we walked through some of the math on that Jon walked through that math on the earlier question. So that's the best I could say. We do not provide specific earnings guidance, and we would not be doing so. But I feel good about 2021.

Mike Grondahl -- Northland Securities -- Analyst

Got it. And then maybe just lastly, your waterfall of purchases, strategic M&A and share repurchases. How much time are you guys putting into strategic M&A? I guess, I'd just like to get a feel for that. Because I would encourage you guys to look at a share buyback, especially with the stock where it's at trading at four-ish times earnings. It's hard to see M&A really being more accretive. But how much time are you spending on strategic M&A?

Ashish Masih -- President and Chief Executive Officer

It's hard to quantify time, but it is -- I mean, we have a corporate development team and then people in each of the markets always looking at opportunities. It's not something new we have started. We've just articulated our capital allocation priorities. So I want to make sure it's the whole messaging is understood in the context. Our goal is first priority is portfolio purchasing, and M&A if it comes along something interesting that's strategic and value creating, of course, and we do it in a disciplined way.

But we also have very clearly articulated that share repurchase as an element of a capital allocation hierarchy. So I hope that's coming across loud and clear, because we wanted to be explicit about our capital allocation priority, which we had not stated in that fashion before.

Mike Grondahl -- Northland Securities -- Analyst

Got it. Have you bought any shares back in 2021 so far?

Ashish Masih -- President and Chief Executive Officer

We have not. Even in the last quarter, even in the windows that were open, we could not buy and that was not blacked out because of the refinancings we had material non-public information. So even if we wanted to, we could not have purchased stock for most of that quarter.

Mike Grondahl -- Northland Securities -- Analyst

Got it. Hey, thank you guys.

Ashish Masih -- President and Chief Executive Officer

You're welcome.

Operator

Your next question is from Robert Dodd of Raymond James. Your line is open.

Robert Dodd -- Raymond James -- Analyst

Hi, guys. Congratulations on a good year in a bizarre time period. If I can on part of the U.S. UK again, but I was looking at it a different angle. Obviously, U.S. 106% of end of '19 expected collections were actually collected. It seems like you know the various stimulus things allowed people to stay, keep their heads above water, so to speak, and keep paying keep up and even pay more, versus the UK at 88%. Well, that tends to imply that even with the furlough programs in place, people would may be barely keeping up if they're not keeping up at all.

So would you say that you have higher confidence and frankly in supply coming back sooner and perhaps sharper in the UK given? So we're only just keeping up under the furlough program, and that furlough program may expire? So could you rank the confidence in which market you think can see the supply come back soon?

Ashish Masih -- President and Chief Executive Officer

Robert. So it's not UK that's at 88%, it's all of Europe Cabot. So within Europe, actually, as we have said in the past and prior earnings calls, the UK was much closer to 100%. And some of the continents or countries where they were lockdowns earlier in the pandemic, court systems are more shut. We have more secure purchasing in those countries. That's where it was lower. So in aggregate, Europe or Cabot was 88%, but UK was actually much better. So, I feel confident about how UK will continue to improve performance as it has done in the past.

But in the second part of your question, yes, the supply, there is more pent up supply perhaps in Europe, people just pause from selling, that may come to market U.S. banks kept selling. So there is a real possibility that we would get more supply from that. Craig, do you have any more color you would like to add on that?

Craig Buick -- Chief Executive Officer of Cabot Credit Management

No, not particularly. The really challenging part is, as I outlined a little earlier, one of the key impacts here on the timing of the supply is around the government measures. And so, we really need to see what all the various governments across Europe are doing in terms of the interventions and how they continue to extend that to support their economies through this period.

Robert Dodd -- Raymond James -- Analyst

Got it, I appreciate that. I can if one more, Ashish. On the M&A side, obviously, various components of particularly the international markets have other players, that may be under more stress than you guys. I mean, obviously, you've handled leverage well. It's down. You've got available capital now. So, I mean, has there been any increase in chatter of discussion where we've had the possibility of cleaning up some competitors in some of these other geographies? And with a potential double benefits that some of those may have been the more aggressive prices before, so can you give us any color on that front?

Ashish Masih -- President and Chief Executive Officer

Yes, on that M&A front, I just want to be clear. So no, there's I mean, if there's chatter with confidential things going on, I'm not sure I can talk about anything like that. But in general, I mean, we're always open to opportunities. And in the past, companies like Asset Acceptance got stressed, and we got them at a good price and a backlog that's performed really well.

But I want to stress, I want to be clear that as we laid out our capital allocation priorities, we wanted to make sure everyone understood kind of how we will think about them. We're not doing any more M&A work or thinking about M&A than been in the past. It's we always paying attention to strategic opportunities. We're always evaluating opportunities and refusing a lot of them, and declining a lot of them. And we want to be very disciplined. And as you saw the left side of the page on our summary slide deck, some balance sheet strength is becoming a real strength for us. And that balance sheet is the leverage range and all of those things are very important to us. So, we will keep those in perspective, while we look at our capital allocation priorities as opportunities come to us whether there's some portfolio purchasing, or if an M&A opportunity comes, and of course, buying back shares is also part of that allocations.

Operator

We have a follow up from Bob Napoli of William Blair. Your line is open.

Bob Napoli -- William Blair -- Analyst

Hi. Just some real quick numbers questions. So I think, Jon, I know, we should expect, correct me if I heard you right, interest expense in the first quarter to be around $45 million on a GAAP basis?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Yes, I would sitting here today, Bob with my crystal ball, I would say that was a pretty good run rate on a quarterly basis for 2021.

Bob Napoli -- William Blair -- Analyst

Great. And the tax rate for '21?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

I probably would tell you, mid-20s. Might come in a little bit lower than that. But mid-20s is reasonable place to start.

Bob Napoli -- William Blair -- Analyst

Okay. And then the earnings growth in '21. Ashish filling again, now there's a couple of numbers. There's the $6.68 that you reported and the $8.40 to $8.50, which is kind of the base, so that you feel good about growing up the $8.40 $8.50 versus the $6.68, obviously?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Yes. So we're not giving guidance again, but we did want to tell you kind of what a base rate in GAAP earnings, which is what we're going to do going forward, was your characterization is accurate in that regard.

Bob Napoli -- William Blair -- Analyst

And then the focus on ROIC, and appreciate the Appendix the chart that you gave on. Now what is the range that you're targeting over the long-term for ROIC?

Ashish Masih -- President and Chief Executive Officer

We are not disclosing or talking about that. We do feel we have a strong ROIC if you compare us against any of our peers in Europe and in U.S. And the gap between that and our weighted average cost of debt is also widened. So, we look to continuously increase value creation, but we do not have a hard target that we would be able to discuss at this point.

Bob Napoli -- William Blair -- Analyst

Okay. Very good. Thank you very much. Appreciate it.

Ashish Masih -- President and Chief Executive Officer

Absolutely.

Operator

Your next question is from Mark Hughes of Truist. Your line is open.

Mark Hughes -- Truist -- Analyst

Oh, I'm sorry, I was going to ask about the run rate on interest expense. I meant to plug out -- drop out. Thank you, though.

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Thanks, Mark.

Ashish Masih -- President and Chief Executive Officer

You're welcome.

Operator

Your next question is from John Rowan of Janney. Your line is open.

John Rowan -- Janney -- Analyst

Good evening, guys. I just have one quick question. In your debt agreements, is there a run rate governor for repurchases? Is it tied to trailing income? Just, maybe frame out, if we don't see a material resumption in purchasing there is going to be a lot of liquidity that's going to build up, at least in my model. And I want to know kind of how far we can push the envelope of repurchases before we get up against the covenant?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

I'd tell you, that's not something I walk around in my pocket for what point we become constrained based on covenants. We've got a lot of latitude in our existing agreements. John, we have a lot of liquidity. And I'm trying to think of a scenario where it would become that particular issue would become difficult that I'm hard pressed to come up with one.

John Rowan -- Janney -- Analyst

Well, some debt agreements just stipulate that you can't go over 100% payout. So I'm just wondering, within the debt agreements is there a stipulation that you can or cannot go above a certain level relative to, I don't know, EBITDA or net income, just anything to base an assumption on?

Jonathan Clark -- Executive Vice President and Chief Financial Officer

We have plenty of room and we have a basket that we can use. But we don't have any at least not a structure in our agreement that is anything like you're describing.

John Rowan -- Janney -- Analyst

Okay. Thank you.

Jonathan Clark -- Executive Vice President and Chief Financial Officer

Okay.

Operator

At this time, I would like to turn it back to Mr. Ashish Masih, for any further comments.

Ashish Masih -- President and Chief Executive Officer

Thank you. That concludes the call for today. Thanks for taking the time to join us. And we look forward to providing our first quarter 2021 results in May.

Operator

[Operator Closing Remarks]

Duration: 59 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

Ryan Bell -- President, Midland Credit Management, Inc.

Craig Buick -- Chief Executive Officer of Cabot Credit Management

Bob Napoli -- William Blair -- Analyst

David Scharf -- JMP Securities -- Analyst

Mark Hughes -- Truist -- Analyst

Mike Grondahl -- Northland Securities -- Analyst

Robert Dodd -- Raymond James -- Analyst

John Rowan -- Janney -- Analyst

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