ARM Index Shows Continuing Erosion of Collection Environment

An index of the economic forces driving the accounts receivable management industry shows a continuing slide in the collectability of consumer debts that has been taking place since late 2006.

The Kaulkin Ginsberg Index (KGI), compiled by ARM industry consulting and advisory firm Kaulkin Ginsberg Company (KGC), slipped 1 percent in the first quarter of 2008 when compared to the fourth quarter of 2007 and 8 percent from Q1 2007. Overall, the KGI is down 16 percent from its high in October 2006.

The KGI is a composite of seven macroeconomic factors that directly impact the ARM industry. The Index provides an overview of the economic environment in which ARM companies do business without addressing the financial or operational results of companies in the industry, according to Paul Legrady, director of KGC.

“What we’re seeing here reflects what we’ve heard in many places,” said Legrady. “The credit crunch is affecting recovery rates, and collections has become more challenging.”

In first quarter earnings releases, the publicly traded debt buyers and collection agencies noted that a challenging collections environment led to higher portfolio impairment charges impacting financial results. Nearly all of the companies reported a slip in earnings in the quarter.

The impairments and weak collections have lead to share price erosion among the public ARM firms over the past year (“Investors Sell Debt Buyers’ Stock as Economy Declines,” May 29).

Legrady noted that of the seven factors impacting the collections environment, the unemployment rate is one that particularly sticks out. Since October 2006, the U.S. unemployment rate has increased to 5.1 percent from 4.5 percent. “If an economic downturn continues into 2009, as many economists project, and unemployment rates increase back to historical averages, then the KGI will fall more dramatically and recovery efforts in the U.S. will become increasingly challenging as a result,” said Legrady.