ENCORE CAPITAL GROUP INCECPG
ENCORE CAPITAL GROUP INC Fair Value Disclosure
Note 2: Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
•Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements as of December 31, 2025 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Interest rate cap contracts | $ | — | $ | 286 | $ | — | $ | 286 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap agreements | — | (16,338) | — | (16,338) | |||||||||||||||||||
| Fair Value Measurements as of December 31, 2024 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Interest rate cap contracts | $ | — | $ | 252 | $ | — | $ | 252 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap agreements | — | (18,360) | — | (18,360) | |||||||||||||||||||
Derivative Contracts:
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using models that project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Non-Recurring Fair Value Measurement:
Certain assets are measured at fair value on a nonrecurring basis. Goodwill and property and equipment are adjusted to fair value when an impairment charge is recognized. Such fair values are determined using various valuation techniques under Level 3 fair value hierarchy. REO assets are classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined at the time of initial recognition and in each reporting period using Level 3 measurements based on appraised values using market comparables. The fair value estimate of the assets held for sale was $18.1 million and $38.1 million as of December 31, 2025 and December 31, 2024, respectively.
Financial Instruments Not Required To Be Carried At Fair Value
The table below summarizes fair value estimates for the Company’s financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts in the following table are included in the consolidated statements of financial condition as of December 31, 2025 and December 31, 2024 (in thousands):
| December 31, 2025 | December 31, 2024 | ||||||||||||||||||||||||||||
Fair Value Level | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 156,784 | $ | 156,784 | $ | 199,865 | $ | 199,865 | ||||||||||||||||||||
Receivable portfolios, net | Level 3 | 4,371,532 | 4,895,167 | 3,776,369 | 4,052,645 | ||||||||||||||||||||||||
Other assets(1) | Level 2 | 118,130 | 118,130 | 128,674 | 128,674 | ||||||||||||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||||||||
| Accounts payable and accrued liabilities | Level 2 | 230,261 | 230,261 | 233,545 | 233,545 | ||||||||||||||||||||||||
| Global senior secured revolving credit facility | Level 2 | 631,998 | 631,998 | 865,365 | 865,365 | ||||||||||||||||||||||||
Senior secured notes(2) | Level 2 | 2,322,890 | 2,385,645 | 1,843,386 | 1,893,367 | ||||||||||||||||||||||||
| Convertible senior notes due October 2025 | Level 2 | — | — | 100,000 | 129,100 | ||||||||||||||||||||||||
| Convertible senior notes due March 2029 | Level 2 | 230,000 | 253,260 | 230,000 | 232,611 | ||||||||||||||||||||||||
| Cabot securitisation senior facility | Level 2 | 343,539 | 343,539 | 319,137 | 319,137 | ||||||||||||||||||||||||
U.S. facility | Level 2 | 450,000 | 450,000 | 283,500 | 283,500 | ||||||||||||||||||||||||
| Other borrowings | Level 2 | 52,926 | 52,926 | 64,904 | 64,904 | ||||||||||||||||||||||||
Other liabilities(1) | Level 2 | 115,158 | 115,158 | 97,731 | 97,731 | ||||||||||||||||||||||||
(1)Only includes financial instruments not required to be carried at fair value. Derivative instruments, which are required to be carried at fair value are excluded.
(2)Carrying amount represents historical cost, adjusted for any related debt discount.
Receivable Portfolios:
The fair value of receivable portfolios is measured by discounting the estimated future cash flows generated by the Company’s proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
Borrowings:
The Company’s convertible notes and senior secured notes are carried at historical cost, adjusted for the applicable debt discount. The fair value estimate for the convertible notes and the senior secured notes incorporates quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
The carrying values of the Company’s senior secured revolving credit facility, securitisation senior facility, U.S. facility and other borrowings approximate their respective fair values due to the use of current market rates that are repriced frequently.
Others:
The carrying values of the Company’s cash and cash equivalents, certain other assets, accounts payable and accrued liabilities, and other liabilities approximate their respective fair values due to their short-term nature.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.