Auto Dealerships Close, A Mixed Bag for ARM?
The proverbial “other shoe” has dropped and it has made a loud thud as the auto makers prepare to close dealerships across the US. This will have profound effects on the US ARM industry. Here are the cold, hard facts: Yesterday, Chrysler named the 789 dealerships that it will be pulling out of over the next few weeks. GM is also expected to name some 1,000 dealerships it plans to pull out of. While not all dealerships will close entirely, expectations are that this will add quickly and significantly to a growing unemployment rate that many believe will top 10 percent before the end of the summer.
Accelerated increases in the unemployment rate will have a profound impact on the US ARM industry in a few ways. If you see the glass half-empty, the most obvious result is that liquidation rates will be negatively impacted, as a debtor’s ability to pay is directly tied to their ability to retain employment. National collection markets including bank card/credit card and telecom have already experienced significant drops in liquidation rates since Q408, with improvement during Q109 tax season. Local collections (i.e. healthcare and municipalities) have remained relatively intact, experiencing less than 10 percent drops in liquidation rates. Anticipated layoffs due to dealership closings across the US will be felt in small and mid-size cities and local collections will inevitably be impacted as a result.
However, if you see the glass half-full; this is not entirely bad news for companies in the ARM industry. Many collection agencies are experiencing a significant increase in placement volumes and as they seek to expand operations to support this influx of new business, they will have ample candidates to choose from to hire. In an industry with consistently high turnover rates, retention levels are also improving as many employees are content they have a job.
This also means increased business for those who know where to look for it. Fewer dealerships will mean less revenue for municipalities that generate taxes from auto sales. Municipalities are already reeling. Faced with the choice of raising tax rates to offset losses or decreasing spending on road repairs or the countless other initiatives on the docket, I believe that a growing number of local governments will be more amenable to outsourcing collections to third party specialists. I encourage you to visit with the government officials in your community and you may be pleasantly surprised by their receptivity. After all, you don’t only provide a valuable service; you employ a lot of their local residents.
Thoughts from the CRS 2009 Conference
It was a pleasure to present the industry keynote at Judy Hammond’s Collection & Recovery Solutions conference (CRS 2009) in Las Vegas last week, where I shared our view on the state of the industry and future trends (you can see the slides from the presentation on kaulkin.com). Attending the show confirmed a lot of what we've been predicting for the industry. Generally, agency executives are bullish about their business due to the significant increase in placement volumes from bank card/credit card clients. First quarter performance was up due to tax refunds, but liquidations are trending down for early stage paper and most do not hold out hope that federal stimulus efforts will be effective in improving recovery efforts. Technology and other vendors are feeling the impact of the recession in the form of increased pressure from their clients to provide additional services at decreased rates.
Debt buyers are voicing their concern about portfolio pricing still being too high relative to liquidation rates (but coming down) and the impact of the credit crunch significantly impairing their ability to finance attractive purchases at reasonable rates. Those who are on the field playing ball are negotiating shorter term forward-flows with their clients and/or partnering with collection agency specialists to assure they are pricing right and have the best collectors locked in to service their purchases.
I am happy to say that quite a few recovery managers were in attendance during the sessions and in the exhibit hall, not just secretly meeting with their vendors away from the event. More so than I can recall in recent years, recovery managers made their presence felt last week.
Judy, Dennis, Chris, and Evan (et al) always produce a 5-star event and I am confident that CRS will be remembered as one of the most intimate and well-attended affairs of the year. Attendance was not down as significantly as I feared because of the impact of the recession on travel budgets and the growing paranoia over the past 2 weeks about the swine flu (I could not find a bottle of hand sanitizer anywhere).
CRS was also a personal milestone, as it was the first event where I posted live updates from the event on Twitter. Please let me know if it was helpful. We may do more twittering in the future.
Shifting Landscape in Mergers and Corporate Divestitures a Sign of the Times
Last week, a merger was announced between two accounts receivable management firms ("North Carolina Collection Companies Merge to Create Stronger Regional Source," April 22). I believe this is indicative of the times for two reasons. First, I strongly believe that over the next 12-24 months, numerous collection agencies, debt buyers, and vendors that are severely impacted by the recession will be forced to merge their operations to cut costs. Others will merge for defensive purposes as they are experiencing a lack of financing to operate their business or purchase debt, or decreased revenues driven by lower recoveries in a down economy.
In these mergers, little or no cash will change hands. Deal structures will include seller financing, earn-outs based upon achieving defined profitability or revenue levels, and/or equity in the surviving entity.
It is important to note that there is still a market for ARM companies that are well-capitalized, operating profitably, and growing. I am addressing the increasing number of underperformers that will more likely be absorbed by larger, better capitalized companies through mergers.
Second, I expect we will see an increase in the number of corporate divestitures of “captive” collection and/or call center operations that are owned by healthcare providers, utilities, banks, and other credit grantors. When companies see a drop in their captive’s recoveries, the decision makers may opt to improve performance and be paid cash by divesting their non-core collection or call center operations, selling them to stand-alone businesses that specialize in providing these services.
If you own or run an underperforming business, you have choices. You can take a wait-and-see approach, hoping that things won’t get much worse. You may be able to work through the recession by cutting costs, firing unprofitable clients, and securing financing on your own. Or, consider joining forces with a larger player that is well positioned to survive.
Debt Portfolio Pricing Down as much as 50%; Further Drops Forecasted
The price to purchase portfolios of charged-off credit card debt has dropped dramatically from Q1 ’07 to Q1 ’09. Does that sentence seem overplayed to you? We’ve all been hearing it in the ARM industry ad nauseam. But few have been able to offer specific numbers on the trend of declining portfolio prices.
In Q1 ’09, prices for freshly charged-off credit card accounts dropped on average 50 percent from a year ago, reaching the point where they are now nearly aligning with liquidation rate declines. Prices are down as much as 60 percent or more from the first quarter of 2007, to a range of $0.05 to $0.07 for fresh credit card paper.
A number of factors are leading to the sharp drop in prices. Principally, liquidation rates are down and buyers are simply not willing to pay as much for an asset that is underperforming. Liquidation rates have dropped on average 55 to 65 percent on fresh credit card debt since the first quarter of 2007.
Buyers are also continuing to find it tough to secure financing for portfolio purchases, and when they do, it is considerably more expensive. This has strained demand for debt portfolios at a time when supply is plentiful, further reducing prices.
Virtually all stages of delinquency have seen price declines in the debt buying market. Secondary and tertiary portfolios are down nearly 70 percent since the first quarter of 2007. Quads are now being sold at a range that dips below a penny. And we believe this trend will continue in 2009 as a result of further liquidation declines driven by ongoing economic turbulence and higher unemployment rates.
The Advisory Team at Kaulkin Ginsberg, myself included, will be discussing these numbers in even greater detail tomorrow at 1pm Eastern in our executive conference call. We’ll be covering specific price ranges for credit card debt across delinquency stages, liquidation rates for ARM firms through the first quarter of this year, the reasons for declines in both, and what you can do to navigate this tricky environment.
You will also get an update on M&A activity in the ARM industry and a detailed look at the financial health of the U.S. consumer. To learn more about the call -- or to register -- please visit http://www.insidearm.com/go/executive-conference-calls/arm-industry-update.
At BusinessWeek, Things Fall In and Out in Editing
Friday’s edition of BusinessWeek ran a disjointed but rather damning article about the use of third-party debt collectors by state and local governments. I was interviewed extensively for the story, along with Nick Bernardo of Net Gain Marketing and several industry experts in municipal receivables. But after reading the resulting article, it seems clear to me that the reporters Jessica Silver-Greenberg and Peter Carbonara had the story already written with their own agenda before they interviewed a single person.
The story is entitled “Are Private Debt Collectors a Bad Bet for Cities?” (BusinessWeek, March 13, 2009). The whole poorly-supported premise of the article: it is better and more cost-effective for municipalities to collect their own debts than if they outsourced to professional debt collectors.
Their claim is inaccurate and misleading for a number of reasons.
Incomplete Reporting
It was not made clear in the article that municipalities and other government agencies tend to send select accounts for collection – generally accounts that are over 180 days past due and/or accounts where internal collection efforts have proven unsuccessful. This is an important distinction, since the kinds of accounts sent to collection agencies are typically more expensive to collect.
The journalists writing this story lacked this fundamental understanding or they chose to ignore it. They faithfully published taxpayer advocate Nina Olson’s claim that if the IRS had invested the $7.5 million it paid in collector fees to retraining existing staff instead, it would have collected $250 million dollars vs. the $37 million collected by the two outside contractors. As many professionals in the industry know, this is a misleading presentation of the facts. If the reporters had read the study, or asked us for clarification, they would know that for in-house collectors, the study includes all overdue taxes, vs. the specific accounts sent out to collection for the contractors. This is an unfair comparison of two different types of debt. Even if their comparison was reasonable, we would all like to see the IRS’s plan for collecting $250 million.
For the same reason, a thorough and diligent reporter might have asked for clarification when Montana’s revenue director, Dan Bucks, says he collects $21.08 for every $1 spent on salaries and expenses, vs. $5.01 in money collected for each $1 spent on an outsourced collection agency. Did his result include all debt collected by his office? If so, this is not an apples-to-apples comparison either.
Unfair: Lack of Balance
The article contends that accusations of “predatory behavior” in the industry are “proliferating,” but then goes on to describe four cases; two examples from 2005, one from 2007 and one from last year.
However the most egregious example of unfair reporting is how they characterize the overall success or failure of municipal collection contracts.
The article describes four examples of governments canceling their contracts with collectors: the IRS, the states of Montana and New Jersey, and Mansfield, Texas.
There is one neutral example of a municipal government in the entire article, Bluff City, Tennessee, that is “farming out” its collection work for $50,000 in back taxes and unpaid speeding tickets, but no indication of the program’s success or failure.
There is not one example of a government entity that is benefiting from using outsourced collection services.
Why?
A fair representation of the facts would not have been able to ignore the numbers.
As the Wall Street Journal and the Washington Post have recently reported, and as industry professionals know to be a fact, a growing number of governments are utilizing professional collection agencies to collect overdue bills including Anchorage, Austin, Baltimore, Dallas, Denver, Fort Lauderdale, Miami, New York City, Orlando, Philadelphia, Tampa, Portland, San Diego, Washington D.C.
Those in the industry know that the U.S. Department of Education has been successfully outsourcing collections for years and just last week publicly announced the expansion of the program. It is public record that in addition to the ED contract, the US Department of Agriculture, and Department of Health and Human Services each utilize private collection agencies and have done so effectively for years. Aside from state and Federal government, mygovwatch.com estimates that roughly a thousand U.S. towns, counties and cities are currently outsourcing to collection agencies.
One of the reporters who co-authored the article, Peter Carbonara, accessed statistics related to growth in public sector debt collection contracts at www.mygovwatch.com made available to him by Nick Bernardo, President of Net Gain Marketing, Inc., the company that owns and licenses the site's content. "After the article was published, I asked the reporter why there was no mention in the article of any of the hundreds of municipalities that are pleased with the professionalism and results of their collection contracts," stated Nick. "The response I got referred to how things can fall in and out during the editing process."
What fell out in the editing was the whole other side of the story that would have made this a balanced piece of journalism instead of a misguided attack against an industry.
I have been around the block enough to know that most media professionals do not write glowing positive articles about debt collectors, and BusinessWeek is certainly not alone in overstating the industry’s isolated problems, but I’m concerned with their blatant lack of balance when covering an important topic. This does a disservice not only to the industry of professional collectors, but to our credit economy as a whole. BusinessWeek may have run an eye-grabbing story that played to stereotypes, but it failed to live up to its own stated Code of Ethics and fulfill its charge to serve the public interest.
FDCPA Reform Should be More Balanced
Late last week, the FTC released its report addressing FDCPA reform proclaiming that “the nature of consumer debt has changed in numerous important ways since enactment of the FDCPA” 30 years ago. While their proclamations throughout the report are valid and will undoubtedly be addressed through reforms of the Act, I am concerned that the FTC is late to its own party.
In today’s volatile economic times especially, implementing sweeping changes to the FDCPA that hamper the recovery efforts of the vast majority of collection businesses that follow the rules would be a catastrophic mistake. Modernizing the laws to address the use of communication technologies that have emerged since the report was written makes sense on the surface, but not, for example, to a point where cell phones are restricted from being called.
Yes it is true, as the report points out, that the industry of debt buying really picked up steam in the 1990’s when most large credit card issuers started selling varying amounts of their past due accounts receivable consistently as part of its recovery process. So what? The point is not that it grew to a position of prominence. The point is that it is a critical part of the recovery process and needs to remain that way in spite of reform.
The Commission went on to state that it believes that changes to FDCPA are necessary to address the evolution of consumer debt, collections, and technology over the 30 years since the Act was written to “provide better consumer protection without unduly burdening debt collection.” I think everyone would agree that by taking a balanced approach to reform that addresses the needs of credit grantors, collection professionals, and consumers, all parties will benefit.
Before the consumer advocacy groups respond, let me state loud and clear that I completely agree that the Act needs to be updated to address all of the changes that have occurred over the past three decades and consumer rights must be protected - not sacrificed - to improve recovery efforts. I just want it to happen in a way that improves the chances of recovering past due accounts receivable that are owed and should be collected.
Holiday Leftovers; Food for Thought for the New Year
Hopefully over the past couple of weeks you were able to find time to take a break from the action to enjoy quality time with family and friends. Here’s to a safe and prosperous New Year.As we all jump back into our work life routines, here are some nuggets to ponder and potentially act upon:
State and local governments are in trouble
I read that 41 states are facing current or looming deficits according to the Center on Budget and Policy Priorities. The only states in good shape fiscally are Alaska, Montana, Wyoming, North and South Dakota, Nebraska, Texas, Indiana, and West Virginia. Over half the states are resorting to cutting spending, tapping reserves or raising taxes to balance their budgets. Numerous municipalities that rely on state funding are also in turmoil. What a mess! Collection agencies across America may want to consider focusing some attention on collection opportunities that exist in their own region among local and state government agencies.
Business financing may be challenging
The number of institutions on the FDIC’s “Problem List” of banks increased from 117 at the end of the second quarter of 2008 to 171 at the end of the third quarter, representing a nearly 50% increase. For comparison, at the end of the forth quarter of 2007 there were 76 institutions on the list. This number is certain to increase significantly in 2009. Securing financing from local banks will remain challenging for most business owners in the foreseeable future.
IRS collection program still in dispute
Some democrats are pushing for the IRS to stop using collection agencies to recover back taxes, arguing that collecting taxes is inherently a government function and it is important that the administration protect the taxpayers. Protect them from what? From fulfilling the obligations they created in the first place? Sounds more like job protection than taxpayer protection to me. I recommend that the federal government evaluate state-level initiatives for collecting past due taxes as well as the success of the US Department of Education private collection program before making any changes to the IRS program. Maybe instead of retracting they will seek more help from collection professionals.
Industry transactions are still taking place
On the mergers and acquisitions front, at Kaulkin Ginsberg we successfully completed the recapitalization of United Recovery Systems (URS) to Audax Group and management just before the Christmas holiday. URS is a well established and recognized leader in bank card / credit card contingency collections. Audax is a successful private equity group that provides investment capital for middle market companies. Terms of the transaction were not disclosed. This transaction is a positive indication for owners who are contemplating a sale or acquisition in spite of a challenging lender market.
Lenders increasing restrictions on consumer credit cards
Charge off volumes and bad debt levels are increasing in a down economy. This is not surprising. What is worth taking note of is that according to some studies, fewer consumers are signing up for new credit cards and using their credit cards less in recent months. A Federal Reserve survey of 55 domestic banks and 21 branches of foreign banks found that nearly 60% reported stricter lending standards on credit card loans. This should only have a limited and short term effect on placement volumes as creditors are placing higher volumes with third party collection agencies and some are turning to the professionals earlier in the lifecycle of the receivables.
I can go on, but that’s enough for now. Please let us know what you’re experiencing. We’re interested to learn what you think is in store for the coming year.
Strong Start to the Holiday Shopping Season. A Good Sign for Recoveries?
From all accounts that I have read, the holiday shopping season got off to a rip-roaring start on Black Friday, as consumers flocked to the malls and outlets to take advantage of massive discounts on just about anything they could purchase. The National Retail Federation estimated that shoppers spent an average of 7.2 percent more than last year. ShopperTrak RCT found Friday sales up 3 percent over last year. I find this remarkable considering the economic conditions. It appears that consumers are still spending.
I read that layaway plans are back at K-Mart and their sister company, Sears. Remember layaway plans? This means that some consumers are hesitant about extending themselves further and instead are paying for their holiday purchases in full before taking them home. Most of these layaway plans have a short lifecycle of a month or two, so the consumer can take the item home in time for the holiday gift giving. The interesting aside to the layaway strategy this time around is that some of the same consumers that are trying to be disciplined buyers are utilizing credit to pay for the items on layaway. Amazing!
Most collection agency executives we have spoken with have shared with us that they are experiencing substantial increases in placement volumes, as clients are turning over accounts at unprecedented levels in virtually all sectors. According to our latest accounts receivable management confidence survey, more than 60 percent of agency respondents said that account placements were “moderately” or “significantly” higher in the third quarter of 2008. Just 14.9 percent of survey respondents reported any type of decrease in current placements.
In our recent discussions with agency executives about recovery levels, most collection agencies that are servicing local accounts in sectors such as healthcare and government are not experiencing a significant drop off in amounts collected. Some are actually seeing improvements. However, collections for bankcard/credit card and other national clients are generally down anywhere from 10-30 percent, although this varies greatly depending upon account age, size, asset class and location.
Here’s my current thinking: If consumers are out spending during the holiday season, that is a good sign that consumer confidence is improving. Hopefully, this will also bode well for collectors during the holiday season and into the first quarter of 2009. What are you experiencing? Comment and let us know
The Next ARM Growth Market: State and Local Governments
The fiscal crisis that is impacting financial institutions, corporations and consumers worldwide is also severely impacting numerous state and local governments. Across America, government financial officers are paralyzed when accessing cash to balance their budgets. Funding is simply not readily accessible. According to Elizabeth McNichol of the Center on Budget and Policy Priorities, state budge gaps for the rest of 2009 and into fiscal 2010 could reach $100 billion. Locally, the U.S. Census estimates there are approximately 35,000 towns and municipalities in the United States, excluding public school districts and county governments. Most of these local governments derive their revenues from three primary areas: federal funding, state aid, and local sources. Funding at this level is severely impacted too.
All indicators point to increasing potential for private sector ARM companies to collect even more government delinquent receivables. Of course, many in the industry are already ahead of the curve (“Higher Government Deficits Leading to Opportunities for ARM Companies,” Nov. 5). Following property taxes, receivables such as delinquent traffic and parking citations, child support payments, library fines, and unpaid court costs (including fees and fines) have become increasingly important to the finance officers and collection managers around the country as secondary revenue streams. Did you know that collectively, municipalities generate roughly $1.25 trillion in revenues each year, a surprising 11% of U.S. GDP. The amount of delinquent receivables owed to U.S. municipalities has been estimated at approximately $40 billion.
Since governments can't borrow in today’s market, spending will be cut and important projects will be put on ice or scrapped altogether. When governments are faced with a choice of cutting spending, raising taxes or collecting past due debts, I am quite sure some will choose what's behind door number three.
Need proof? From April 1 through the end of June 2008 there were more than 80 state contracts released for bid. Here in the greater Washington DC region, my neck of the woods:
- Prince William County is reviewing proposals for the purpose of establishing a contract with a qualified service provider to collect on delinquent tax accounts. The County does not currently have a contract for collection services.
- Montgomery County Md., one of the wealthiest counties in the country, last month sold about $5 million in tax debts of residents and business owners. A similar auction last year sold about $3.6 million in tax debts to debt purchasers.
- Prince Georges, Co., Md., sold last month about $14 million in tax debts, up from the $10 million it put up for sale in 2007, according to the Examiner.
- Public libraries in Staunton and Waynesboro, Virginia, began referring unpaid library fees of greater than $25, and delinquent for more than 42 days, to collection agencies in March 2007. Since 2003, these and other libraries in Augusta County have accumulated more than $100,000 in costs from unreturned items. That figure represents more than half of the county’s annual budget for new library materials.
Consider the potential expansion opportunities for your business by approaching state and local governments in your own region to address their own collection needs. There is a growing need and increased receptivity among government officials to work with collection agencies and debt buyers. Sounds like fertile ground to me.
To Attend or Not to Attend? That is the Question
‘Tis the season to spend money. No, not on gifts for your loved ones for the holidays – that typically begins after Halloween. It is conference season. Fall is that special time of year when we have to decide whether we should invest the time, energy and money to attend industry trade shows. And in a down economy, these decisions are even more significant.
There are many ARM conferences to choose from. Too many! Way too many! Over the past two weeks alone, I attended the Credit & Collection Symposium of the Americas (CCSA) which was held in Miami and SourceMedia’s revamped fall conference, Financial Services Collections Conference (FSCC). Just a few weeks earlier it was Judy Hammond’s fall extravaganza, the Debt Connection Symposium (DCS) and next week is the ACA’s Fall Forum. Then it is on to Collection Advisor’s Tech2008 and Collection Technology. Lions, tigers and bears oh my!
Why do we attend conferences? There are really only two simple answers: compelling content and/or significant networking opportunities. What else is there? I suppose some of us are looking to escape from our offices or families for a few days to Vegas or Miami (or Chicago in November, oh my) and can justify living out of a suitcase for more than a month to indulge in life’s indiscretions. Pull those people out because they would attend a conference regardless of the topic as long as it is in Vegas or South Beach. Most of us need at least one compelling reason to attend a conference.
A compelling conference really starts with a compelling leader. A compelling conference leader is someone who truly gets it. It is typically someone who comes from the industry, knows the industry and can deliver exactly what the audience wants and deliver it consistently year after year. Judy Hammond is that kind of person. So is Pablo Andres Salamone. Pablo and his partner started a collection agency in Argentina nearly 20 years ago when collections were not typically outsourced. He identified a need to bring Latin American credit and collection professionals together so he formed Credit Management Solutions (CMS). Now he runs successful conferences in numerous South American countries, the Caribbean and Mexico. Thousands of credit and collection professionals attend his shows and come back for more. And as Hispanic collections have grown in the US, Pablo has brought his specialization to the states.
Compare this high level of commitment to produce a compelling experience to SourceMedia. Pablo is clearly the leader behind CMS. Who is the leader behind SourceMedia’s FSCC? I don’t know either. Source Media follows an entirely different model altogether. They select a new Master of Ceremonies for each show and this person is responsible for driving compelling content and working with the conference coordinator (who left just prior to the event this year) to select speakers and topics. Next year there will inevitably be a new MC working with potentially new SourceMedia employees.
Conferences should not be run by using the same old cookie cutter model each and every year. They need to cover relevant and timely topics to attract the movers and shakers. In a tough economy, credit and collection professionals and exhibitors alike have to choose very carefully where they spend their time and money. If the conference does not provide a compelling experience year after year they should show lack of satisfaction and not attend.
What do you think? Did you attend a conference this fall? Why did you attend? Was it worth your time and money? Did you stay away because you could not justify spending the time or paying the price to attend or exhibit? You get the picture. Let us know what you think.
