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From the lovely Heather at Credit Today...
As the economic environment continues to deteriorate, Heather Greig-Smith asks if the debt purchase market can cope in a downturn
With tight collections and even tighter funding, but a growth in the number of sellers and their reliance on releasing cash through debt sale, the picture for debt purchase in 2009 is mixed. Exposed to consumer payment performance in a worsening economy, buyers are undoubtedly vulnerable and it is possible one or two will not see out the year. However, the climate also offers opportunities and many of the larger players are bullish about their prospects.
Two clear candidates for concern are Robinson Way and the Lewis Group. Robinson Way’s parent company London Scottish Bank is in administration and administrators at Ernst & Young are trying to find a buyer for the hybrid, which is trading outside of the insolvency process.
Robinson Way managing director Graham Prosser said the business is trading as usual while it prepares for sale. "It is an orderly sale and we’ve had tremendous support from clients," he said.
Meanwhile, the Lewis Group is owned by specialist lender Cattles, which faces an uncertain future as it waits for a decision on its retail banking licence application and has the additional challenge of refinancing by July. Cattles has been forced to cut 1,000 jobs (though none are in the Lewis Group) and the outcome for the lender is uncertain.
David Berry, managing director of The Lewis Group, dismisses the suggestion that it will suffer. "The key challenge for 2009 is not about who your parent company is, but rather about the timing of when funds need to be renewed," he says. "The Lewis Group will have funds in place to fulfil its contractual obligations; Cattles will also be making funds available to buy further portfolios where a proven return can be made."
Aktiv Kapital is having a difficult year and will lose 15 per cent of its global workforce as it tries to cut costs and increase efficiency. The redundancies, which will include 40 job losses across its UK operations, aims to save the firm around 100m Kroner a year. The buyer is also thought to be close to appointing a UK chief executive – a post left unfilled since Philip Lunn left in September last year.
Other buyers are also making changes – 1st Credit is reorganising after co-founder Mike Cleary stepped back and Najib Nathoo became chief executive in November. It could make 33 people redundant as it reorganises. However, director Charles Holland said the company still intends to buy greater volumes of debt this year.
Cabot Financial last month took on a legal team of 12 people from the solicitor’s firm it used to outsource cases to. Ken Maynard, the company’s chief executive, says as the team becomes more established it will offer services to others in the industry.
Meanwhile others in the market are changing ownership and looking at their expansion plans. As Credit Today went to press last month buyer Arrow Global was thought to be close to making an announcement on its plans.
Talent counts
Now is the time when being very good at collections really counts and those who have overpaid for portfolios in the past will feel it. If the cash isn’t coming in and funders are unsympathetic about changing collections curves from those previously reliant on early settlement of accounts, there could be choppy waters ahead.
Mark Onyett, chief executive of debt management service provider TDX Group, says cash flow is crucial. "Nearly all purchasers are struggling somewhat with funding. Part of their funding comes in equity which is cash thrown off their portfolios. With liquidity dropping there is less cash available to reinvest. There may be one or two purchaser failures over the next year because things unravel pretty quickly."
If a debt purchaser failed it is likely the banks would step in and sell on the portfolios. Unlike a decade ago when American purchaser CFS went bust, there are plenty of big buyers to step in and take up the slack. However, the risk to debt purchase’s reputation is significant, says Onyett. "Clients would ask what it meant for their customers and there could be negative PR around that." Others say the uncertainty surrounding Robinson Way’s future has already had an impact in this area.
Pricing pressure
But how realistic are lenders about the changing fortunes of debt buyers and the diminishing returns they can expect on their portfolios? Paul Burdell, chief executive of buyer Link Financial, says there has been a notable change in attitude by many banks. "The banks are being much more user-friendly," he says. "Pricing still hasn’t stabilised. The trend is down and will continue to go down depending on the liquidity of certain funds and investors."
Lowell Group chief executive James Cornell agrees: "Most lenders are pretty realistic in their expectations. They can understand why there is a need for the price to decline. It’s not just liquidity rates but the availability of capital as well." He adds that "fresher, higher balance portfolios" are taking bigger pricing hits because the expectation of early settlement is far lower.
"Those that are adapted around that type of debt have more to change," says Cornell.
He points out that commission structures for many call centre collections operations will have to evolve to reflect the collections environment and negotiation tactics may need altering where demanding full payment is likely to alienate the consumer. (No sh!t, Sherlock!)
Maynard adds that using data is crucial to assess which customers are able to pay and how much they can manage. "You want people to do a deal they can keep paying," he says. This determines portfolio pricing. "There have been a few sales recently where the prices expected have been too high. One or two portfolios haven’t been sold because of it."
The early settlement model is defunct. "The re-lenders have gone bust. That market has gone. Large one-off settlements are not going to be happening," says Burdell. Both Link and Lowell expect to expand in 2009 as planned.
1st Credit’s Holland agrees that pricing is coming down, though he says there are still people who are paying too much. "Prices have reduced, particularly on the forward flow side and it is sensible to negotiate tighter terms and conditions," he says. "There is still some money out there and still some people paying higher prices, but not the mature players."
According to Burdell, "there needs to be a clear definition between unsecured and secured assets. What unsophisticated buyers and investors have been doing is buying non-performing portfolios at prices that were better than people were receiving on secured assets." He says buyers should not be afraid to walk away if the price doesn’t fit.
David Hosein, partner at strategy consultancy OC&C, also believes prices are falling but not uniformly. "Two months ago people were talking about 20 per cent, now I think it’s even higher than that. We’re seeing quite wide pricing variations."
He adds that the consequences of buying debt that’s still too highly priced in a falling market, with falling collections performance and funding difficulties, is the scenario some inexperienced buyers may find themselves in.
Neil Birnie is managing director of Carval Investors, which advises funds on debt purchase. He says one big issue is unemployment and that even individuals who are saving instead of spending may keep their cash in case they lose their jobs. Birnie adds that there are worrying trends in the US, where mobile phone receivables have collapsed. "It seems counter intuitive, but the debts are too small to economically sue in the US, and people can give up their mobile phone and buy a pay as you go," he says.
Pockets of opportunity
However, Holland adds that there is an opportunity to form good relationships with debtors who are keen to co-operate because they don’t want their accounts to be passed to the litigation stage. He is philosophical about the tightening consumer environment. "By the time people come to our side of the market they’re probably in recession and economic hardship anyway."
Also on the positive side, buyers such as Link and Arrow are keen to capitalise on the open markets in Europe. Arrow chief executive Zach Lewy says: "While liquidity is affected here, it’s very badly affected on the continent. Investment institutions such as Lehman Brothers and Bear Sterns were doing a lot – they have now gone. The pan-European players have all retreated." He says this could accelerate Arrow’s expansion as its model does not tie it to "bricks and mortar" UK call centres.
It’s not all easy though. Maynard says Cabot’s European expansion will continue, but the exchange rate doesn’t help investment. "It’s a little bit more challenging when the exchange rate doesn’t work for you," he says. "You’re repatriating the profits, which is good, but further investment is more challenging."
Onyett suggests that falling prices could lure investors back to the UK this year. "Some slack is being taken up by new funders," he says. "Hedge funds and even some big investments banks have done more in continental Europe than the UK because pricing has been very high. The hedge fund market is looking for 20 to 30 per cent IRR. Now there are pockets of opportunity."
It is not going to be an easy year. Good buyers and collectors will outstrip their peers and some may falter. Some suggest the major fear should be government intervention such as a scheme for mass debt forgiveness. A year ago it would have been inconceivable. Now, the only certainty is that anything can happen.
TDX: the expansion
TDX Group’s success at securing funding from private equity backer Investcorp in a difficult market at the end of last year has further validated the view that debt management is a market to watch.
The group sold a 40 per cent stake for £28m and Onyett says Investcorp expects serious growth. "Investcorp have ambitions for us to be a very large multinational business. They have had a lot of success on this with their other investments," he says.
This will mean expanding the business lines it offers. "There’s nothing that we’ve specifically singled out but the most obvious area adjacent to what we do is the area of fraud management," says Onyett. "We have a lot of fraud expertise."
Before then, TDX will "finish off" its financial difficulties offer, adding a bankruptcy management service to existing services for individual voluntary arrangements and debt management plans. Likely to be called BKX, the Bankruptcy Exchange will sit alongside The Insolvency Exchange (TIX) and the Debt Management Exchange (DMX).
While there is a lot of growth left in the UK market, Onyett says TDX is looking to grow some of its business lines in overseas markets beyond its Spanish business. It is already working in France, Italy and Greece. Germany is another obvious target for its financial difficulties offering.
"For three to four years creditors that haven’t changed their recoveries approach haven’t done so because they’ve been fine doing the same thing and finding that it yields results. As the world changes people are going back and taking a look at it," predicts Onyett.
With tight collections and even tighter funding, but a growth in the number of sellers and their reliance on releasing cash through debt sale, the picture for debt purchase in 2009 is mixed. Exposed to consumer payment performance in a worsening economy, buyers are undoubtedly vulnerable and it is possible one or two will not see out the year. However, the climate also offers opportunities and many of the larger players are bullish about their prospects.
Two clear candidates for concern are Robinson Way and the Lewis Group. Robinson Way’s parent company London Scottish Bank is in administration and administrators at Ernst & Young are trying to find a buyer for the hybrid, which is trading outside of the insolvency process.
Robinson Way managing director Graham Prosser said the business is trading as usual while it prepares for sale. "It is an orderly sale and we’ve had tremendous support from clients," he said.
Meanwhile, the Lewis Group is owned by specialist lender Cattles, which faces an uncertain future as it waits for a decision on its retail banking licence application and has the additional challenge of refinancing by July. Cattles has been forced to cut 1,000 jobs (though none are in the Lewis Group) and the outcome for the lender is uncertain.
David Berry, managing director of The Lewis Group, dismisses the suggestion that it will suffer. "The key challenge for 2009 is not about who your parent company is, but rather about the timing of when funds need to be renewed," he says. "The Lewis Group will have funds in place to fulfil its contractual obligations; Cattles will also be making funds available to buy further portfolios where a proven return can be made."
Aktiv Kapital is having a difficult year and will lose 15 per cent of its global workforce as it tries to cut costs and increase efficiency. The redundancies, which will include 40 job losses across its UK operations, aims to save the firm around 100m Kroner a year. The buyer is also thought to be close to appointing a UK chief executive – a post left unfilled since Philip Lunn left in September last year.
Other buyers are also making changes – 1st Credit is reorganising after co-founder Mike Cleary stepped back and Najib Nathoo became chief executive in November. It could make 33 people redundant as it reorganises. However, director Charles Holland said the company still intends to buy greater volumes of debt this year.
Cabot Financial last month took on a legal team of 12 people from the solicitor’s firm it used to outsource cases to. Ken Maynard, the company’s chief executive, says as the team becomes more established it will offer services to others in the industry.
Meanwhile others in the market are changing ownership and looking at their expansion plans. As Credit Today went to press last month buyer Arrow Global was thought to be close to making an announcement on its plans.
Talent counts
Now is the time when being very good at collections really counts and those who have overpaid for portfolios in the past will feel it. If the cash isn’t coming in and funders are unsympathetic about changing collections curves from those previously reliant on early settlement of accounts, there could be choppy waters ahead.
Mark Onyett, chief executive of debt management service provider TDX Group, says cash flow is crucial. "Nearly all purchasers are struggling somewhat with funding. Part of their funding comes in equity which is cash thrown off their portfolios. With liquidity dropping there is less cash available to reinvest. There may be one or two purchaser failures over the next year because things unravel pretty quickly."
If a debt purchaser failed it is likely the banks would step in and sell on the portfolios. Unlike a decade ago when American purchaser CFS went bust, there are plenty of big buyers to step in and take up the slack. However, the risk to debt purchase’s reputation is significant, says Onyett. "Clients would ask what it meant for their customers and there could be negative PR around that." Others say the uncertainty surrounding Robinson Way’s future has already had an impact in this area.
Pricing pressure
But how realistic are lenders about the changing fortunes of debt buyers and the diminishing returns they can expect on their portfolios? Paul Burdell, chief executive of buyer Link Financial, says there has been a notable change in attitude by many banks. "The banks are being much more user-friendly," he says. "Pricing still hasn’t stabilised. The trend is down and will continue to go down depending on the liquidity of certain funds and investors."
Lowell Group chief executive James Cornell agrees: "Most lenders are pretty realistic in their expectations. They can understand why there is a need for the price to decline. It’s not just liquidity rates but the availability of capital as well." He adds that "fresher, higher balance portfolios" are taking bigger pricing hits because the expectation of early settlement is far lower.
"Those that are adapted around that type of debt have more to change," says Cornell.
He points out that commission structures for many call centre collections operations will have to evolve to reflect the collections environment and negotiation tactics may need altering where demanding full payment is likely to alienate the consumer. (No sh!t, Sherlock!)
Maynard adds that using data is crucial to assess which customers are able to pay and how much they can manage. "You want people to do a deal they can keep paying," he says. This determines portfolio pricing. "There have been a few sales recently where the prices expected have been too high. One or two portfolios haven’t been sold because of it."
The early settlement model is defunct. "The re-lenders have gone bust. That market has gone. Large one-off settlements are not going to be happening," says Burdell. Both Link and Lowell expect to expand in 2009 as planned.
1st Credit’s Holland agrees that pricing is coming down, though he says there are still people who are paying too much. "Prices have reduced, particularly on the forward flow side and it is sensible to negotiate tighter terms and conditions," he says. "There is still some money out there and still some people paying higher prices, but not the mature players."
According to Burdell, "there needs to be a clear definition between unsecured and secured assets. What unsophisticated buyers and investors have been doing is buying non-performing portfolios at prices that were better than people were receiving on secured assets." He says buyers should not be afraid to walk away if the price doesn’t fit.
David Hosein, partner at strategy consultancy OC&C, also believes prices are falling but not uniformly. "Two months ago people were talking about 20 per cent, now I think it’s even higher than that. We’re seeing quite wide pricing variations."
He adds that the consequences of buying debt that’s still too highly priced in a falling market, with falling collections performance and funding difficulties, is the scenario some inexperienced buyers may find themselves in.
Neil Birnie is managing director of Carval Investors, which advises funds on debt purchase. He says one big issue is unemployment and that even individuals who are saving instead of spending may keep their cash in case they lose their jobs. Birnie adds that there are worrying trends in the US, where mobile phone receivables have collapsed. "It seems counter intuitive, but the debts are too small to economically sue in the US, and people can give up their mobile phone and buy a pay as you go," he says.
Pockets of opportunity
However, Holland adds that there is an opportunity to form good relationships with debtors who are keen to co-operate because they don’t want their accounts to be passed to the litigation stage. He is philosophical about the tightening consumer environment. "By the time people come to our side of the market they’re probably in recession and economic hardship anyway."
Also on the positive side, buyers such as Link and Arrow are keen to capitalise on the open markets in Europe. Arrow chief executive Zach Lewy says: "While liquidity is affected here, it’s very badly affected on the continent. Investment institutions such as Lehman Brothers and Bear Sterns were doing a lot – they have now gone. The pan-European players have all retreated." He says this could accelerate Arrow’s expansion as its model does not tie it to "bricks and mortar" UK call centres.
It’s not all easy though. Maynard says Cabot’s European expansion will continue, but the exchange rate doesn’t help investment. "It’s a little bit more challenging when the exchange rate doesn’t work for you," he says. "You’re repatriating the profits, which is good, but further investment is more challenging."
Onyett suggests that falling prices could lure investors back to the UK this year. "Some slack is being taken up by new funders," he says. "Hedge funds and even some big investments banks have done more in continental Europe than the UK because pricing has been very high. The hedge fund market is looking for 20 to 30 per cent IRR. Now there are pockets of opportunity."
It is not going to be an easy year. Good buyers and collectors will outstrip their peers and some may falter. Some suggest the major fear should be government intervention such as a scheme for mass debt forgiveness. A year ago it would have been inconceivable. Now, the only certainty is that anything can happen.
TDX: the expansion
TDX Group’s success at securing funding from private equity backer Investcorp in a difficult market at the end of last year has further validated the view that debt management is a market to watch.
The group sold a 40 per cent stake for £28m and Onyett says Investcorp expects serious growth. "Investcorp have ambitions for us to be a very large multinational business. They have had a lot of success on this with their other investments," he says.
This will mean expanding the business lines it offers. "There’s nothing that we’ve specifically singled out but the most obvious area adjacent to what we do is the area of fraud management," says Onyett. "We have a lot of fraud expertise."
Before then, TDX will "finish off" its financial difficulties offer, adding a bankruptcy management service to existing services for individual voluntary arrangements and debt management plans. Likely to be called BKX, the Bankruptcy Exchange will sit alongside The Insolvency Exchange (TIX) and the Debt Management Exchange (DMX).
While there is a lot of growth left in the UK market, Onyett says TDX is looking to grow some of its business lines in overseas markets beyond its Spanish business. It is already working in France, Italy and Greece. Germany is another obvious target for its financial difficulties offering.
"For three to four years creditors that haven’t changed their recoveries approach haven’t done so because they’ve been fine doing the same thing and finding that it yields results. As the world changes people are going back and taking a look at it," predicts Onyett.
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