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Investing.com -- Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) and senior unsecured debt ratings of PRA Group Inc. (PRA) to ’BB’ from ’BB+’, with a stable outlook. The downgrade, announced on Thursday, June 5, 2025, is attributed to PRA’s elevated leverage profile and the expectation that this leverage will continue to be under pressure due to ongoing debt-funded portfolio purchases and less-than-expected improvement in collection efficiency.
PRA’s cash flow leverage has exceeded Fitch’s 2.5x downgrade trigger since 2023. The challenging macro environment, coupled with increasing legal expenses and potential moderation in expected recoveries, could delay significant profitability enhancements in the near term.
Despite these challenges, PRA’s ratings reflect its leading global debt purchasing franchise operating across 18 countries in the Americas, Europe, and Australia. The company also boasts a solid adjusted EBITDA margin, good funding flexibility, and adequate liquidity with limited near-term refinancing risk.
PRA’s strategic focus is on optimizing portfolio pricing, enhancing operational effectiveness, and managing costs. However, ongoing investments in legal collections have delayed cash efficiency improvements, keeping it below 60% longer than anticipated.
The company’s leadership change, with Martin Sjolund’s appointment as CEO, is not expected to alter PRA’s strategic direction. Fitch anticipates a heightened focus on expense management to drive operational efficiency.
Adjusted EBITDA increased 13% year-over-year for the trailing 12 months (TTM) ended 1Q25, with the adjusted EBITDA margin remaining relatively stable at 60.6% compared to one year ago. However, the cash efficiency ratio remains below management’s guidance of above 60% for 2025, in part due to a significant increase in legal collection costs.
PRA’s gross debt-to-adjusted EBITDA was 2.9x for the TTM ended 1Q25 and has sustained above Fitch’s 2.5x downgrade trigger. Despite favorable market conditions for portfolio investments, Fitch believes slower-than-expected improvements in operational effectiveness and a challenging collection environment will hinder de-leveraging efforts.
PRA’s gross debt-to-tangible equity has risen to 4.3x in 1Q25 from 4.1x a year ago, though PRA’s tangible equity remains adequate, supported by organic capital generation and limited shareholder distributions.
The unsecured funding mix remained generally stable at 37% as of 1Q25. Liquidity comprises $129 million in unrestricted cash and $538 million of available revolving credit facilities at end-1Q25. The next debt maturity is not until November 2027 when its European revolving credit facility comes due.
Interest coverage was solid at 5.0x for the TTM ended 1Q25, although below the 2021-2024 average of 7.5x, corresponding to a ’bbb’ category benchmark of 6x-10x. Fitch believes interest coverage will remain relatively stable as adjusted EBITDA growth should offset rising interest costs.
The Stable Outlook reflects Fitch’s expectation of no material change in business strategy following the recent leadership transition. The Outlook also assumes PRA will continue executing its objectives to improve collection efficiency and profitability metrics, which should, over time, reduce its gross-debt-to-adjusted EBITDA toward the midpoint of the guidance range and maintain tangible leverage below 5x.
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