The economy appears to be heading back on track. This bodes well for liquidations.
Recovery from the most pervasive recession since the Great Depression continues to move in a positive direction causing some naysayers to change their tune and join the ranks of the bulls who have already concluded that the U.S. recession ended about mid year. Has the final chapter for the recession that began in 2007 finally been written? Is liquidation performance going to get back on track? Let’s blog.
The high level of bullish optimism among analysts, economists and even CEOs stems from the release of the third-quarter U.S. gross domestic product (GDP) report which showed solid real growth at a better-than-consensus 3.5% annual rate. This report covers numerous indicators and extends a run of positive economic reports that has consistently beat forecasts for about six months and counting. Adding fuel to this fire is the outlook for continued improvements in corporate profits, the stock market’s recent strong performance and double digit improvements in U.S. manufacturing output in Q3. This list goes on, but you get the picture.
The bears among us are casting doubt on the sustainability of the economic rebound particularly since it has been so heavily dependent upon government stimulus money that, they will point out, has generated short lived results. The naysayers will also point to the U.S. unemployment rate which reached 10.2% in October, passing the double digit mark for the first time in more than a quarter century. They will go on to tell you that payrolls declined for the 22nd straight month and that foreclosures jumped nearly 23% in the third quarter with expectations that foreclosure rates may accelerate in 2010 driven by high unemployment and more adjustable rate loans resetting to higher monthly payments. This list goes on too but, again, you get the picture.
We will take our respective sides as we tend to do, joining the ranks of the bulls or the bears to debate the results. Ultimately the real driving force for those of us who are focused on liquidation results is tied directly to the behavior of the consumer (otherwise known as the debtor in the ARM industry). Since the unemployment rate continues to increase, and since foreclosures have climbed to levels never seen before, consumer confidence has deteriorated, marking a fresh low in September, a low that has only been surpassed once before — at the end of the early 1980s recession which, by the way, was the last time the unemployment rate was so high.
Therefore, I am sorry to say, we are not out of the woods yet. The good news is that debtors tend to have their lowest level of confidence during the first part of the recovery because the indicators that affect them the most, jobs and housing, are reaching their peak. Combating this are the companies that have stated their intentions to start hiring again and the companies that are suspending layoffs which are good signs the recession is starting to move behind us. Interestingly, the ARM industry appears to be one of the sectors that is ready to hire again, according to our latest Confidence Survey results.
We expect that liquidations will continue to stabilize for the rest of the year and possibly improve compared to last year’s Q4 results given that liquidations declined last year as much as 45% to 60% in Q4 (not exactly impossible to improve on that performance). Despite the growing concerns in the commercial real estate market, liquidations of consumer portfolios will likely stabilize in Q1 of ’10 compared to Q1’09 as well given that most consumers have increased their savings rates and will want to continue reducing their debt loads – the government is also considering additional stimulus programs that may include another tax rebate if needed.
What are you seeing in your own recovery efforts?
An Idea Whose Time Has Come
From texting to iPods to smart phones, technology has dramatically changed the way we live our lives. At the end of last year when the economy soured and travel budgets were slashed, I started to wonder; “Why can’t technology be utilized to revolutionize the exhibition hall experience?”
Why can’t it? What if you could get access to all participants at an exhibition without ever leaving your desk? What if it was absolutely free to attend, so you could send all interested staffers – from the IT department to Operations? What if easy access made it possible for the entire ARM industry to attend – including credit grantors, debt buyers, and ARM service providers? What if we could make this happen? Would you participate?
We thought so and that is why we created the ARM industry’s first-ever virtual expo, Expo 3.0
Envision an efficient and cost-effective expo conducted entirely online. You can literally “visit” booths, interact with decision makers through group or private chat, see a video introduction of the company or product, and leave with relevant information and appropriate contacts – all without having to leave your desk.
^pullquoteLearn more about Expo 3.0 at http://www.insidearm.com/expo/ pullquote^
Because of the expense of travel, cost to attend, and time out of the office – not to mention the travel restrictions placed upon many professionals – many stakeholders in the process of selecting vendors haven’t been able to attend tradeshows. On the flip side, these restrictions prevent vendors from sending technicians or developers to staff their booths. That’s about to change. For the first time, entire staffs will have one place to go to evaluate products and services needed to improve recoveries. Through Expo 3.0, there are no restrictions. Everyone on both sides of the buying decision can attend without the hassles of travel.
EXPO 3.0 is free to all attendees, so senior management, IT staff, collection staff, and anyone else is able to attend from their desk. And since booths at Expo 3.0 will be available for 90 days after the live event, attendees can still get the information they need even after the live show ends.
As active participants in the affairs shaping the ARM industry for nearly 20 years, Kaulkin Ginsberg has been involved in virtually every trade show and conference geared toward credit grantors, collection agencies, collection law firms and debt buyers. This year alone, our firm participated in over 17 live events. We know and appreciate the fact that there’s no substitute for face-to-face interaction. We saw the need to address the limitations involved with live events and that is why we developed a virtual experience focused exclusively on the exhibit hall.
We truly see EXPO 3.0 as a new and powerful tool to enhance and facilitate introductions within the ARM industry, and we are committed to using all of our resources to making this a successful event for all participants. I hope we’ll see you there!
Follow Michael Lamm on Twitter from ACA Northeast Expo
Michael Lamm, Associate at ARM advisory firm Kaulkin Ginsberg, is at ACA International’s Northeast Debt Collection Expo & Conference in Atlantic City, N.J. He will be providing updates from the meeting via Twitter.
You can follow Michael directly from his Twitter feed (http://twitter.com/mlammkgc) or check back here for live updates.
Twitter Updates
ARM Industry Leaders Gather in DC for the ACA Capitol Hill Fly-In
Last night, I attended ACA International’s Open House celebrating the opening of their new Federal Affairs office in Washington, D.C. The association’s Executive Committee, agency owners, senior executives, and ACA leaders participated and members from neighboring associations stopped by. It was a nice evening.
The purpose of the event is significantly more meaningful than a typical open house celebration. Today (October 1) is the ACA's Capitol Hill Fly-In event, where industry leaders from across the country are gathered together to meet with members of the House and Senate and their staffs to garner support for the industry’s federal legislative agenda. As the current Administration attempts to create a Consumer Financial Protection Agency, reform healthcare legislation, and modernize FDCPA, industry participation is crucial.
The Consumer Financial Protection Agency (CFPA) alone is cause for concern for the accounts receivable management industry. There is a good chance that the new agency will oversee the FDCPA, making it the ARM industry’s new regulator (“Proposed Consumer Financial Protection Agency May Oversee FDCPA Enforcement,” June 25).
I am thrilled with the energy of the participants who are taking time out of their own busy schedules this week to lobby on behalf of the industry. Their efforts should not go unnoticed and should not be limited to a few days on Capital Hill. Many initiatives will have to be addressed in months to come at state capitals across the country -- and increasingly at the local municipal level as well. Participation at these levels is critical too.
On a personal note, there was another gathering of industry veterans a couple of weeks ago that should not go unnoticed. They came to pay their respects for the passing of friend and colleague, Pete Nance. His last venture in collections was the creation and sale of FAMS with partner and friend R.T. Cardwell. Pete touched a lot of people during his decades of collection service, including mine, and he will be missed by many.
Thinking Strategically in the Current ARM M&A Landscape: Dissecting the Central Credit Services - Astra Transaction -
The accounts receivable management (ARM) industry is still operating under severe financial constraints, like the rest of the economy, especially when it comes to securing resources for expansion. But mergers and acquisitions are happening for those with the strategic vision to creatively integrate operations.
Many deals in the ARM industry are tactical; they are driven by the need to expand client rosters. Indeed, acquiring a company that you do not directly compete with can be the best way to grow a client list. And even in a down economy, small tactical deals are happening. But larger deals require a more strategic vision before investors and capital jump onboard.
A recent example is Jim Eccleston, Chairman & CEO of Central Credit Holdings (CCH), with its wholly owned subsidiary Central Credit Services a auto deficiency, bankcard/credit card focused agency headquartered in Jacksonville, Fla. His firm recently acquired Astra Business Services, a collection agency based in California, but with more than 210 collectors in two locations in India. Kaulkin Ginsberg represented Astra in the deal.
Although my view was from the other side of the transaction, the long-term strategic plan involved on the acquiring side of the transaction was what drove it to close. Jim wanted to give his clients a viable offshore option that he owned and managed. Jim, and the venture capital that backs his firm, liked that Astra had started as an ARM shop in India, rather than migrating CRM agents to collection work. What really leapt out at me was that he was relatively uninterested in Astra’s current clients; he cared more about the highly tenured staff that was in place and the facilities that house them. Also, there was plenty of capacity at Astra’s two locations for expansion. So the deal brought him immediate capacity that would have taken years to develop.
The strategic fit was clear: acquire an offshore platform that would allow Central Credit Services to offer clients and potential clients a low-cost, full service ARM solution, one that could be easily expanded in current facilities.
Deal activity in the ARM industry has been less active than in prior years due to the economic conditions, but deals are still getting done that are driven by clear visions of how the acquired entity will fit into the overall company.
Michael Lamm (http://www.linkedin.com/pub/0/61/a2b) advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory team. Michael can be reached directly at 240-499-3808 or by email. You can also read his other blogs/articles at http://www.insidearm.com/go/blogs/Lamm.
Follow Mike Ginsberg on Twitter at DCS 2009
Kaulkin Ginsberg CEO Mike Ginsberg is in Puerto Rico at Dennis and Judy Hammond's Debt Connection Symposium and Expo 2009. DCS focuses on allowing the ARM industry to network with their peers within the industry as well as credit granting professionals and technology vendors.
Mike will be giving live updates from the conference on Twitter. You can follow his updates below, or directly from the Twitter site at http://twitter.com/mike_ginsberg.
Would the Real Unemployment Rate Please Stand Up
I love how the government and media quietly announced the unemployment statistics for August last Friday as many of us were either out of the office or rushing to get an early start to the Labor Day weekend.
I enjoyed even more the subtle way in which the news acknowledged the fact that the unemployment rate jumped to 9.7 percent, only 30 days after we had heard that it had declined in July to 9.4 percent from 9.5 percent in June, a trend which was heralded as evidence that the U.S. had reached or was near the bottom of this recession. Of course we learned last Friday that the unemployment figures for July were “upwardly revised” and as a result we didn’t experience a decline in the first place, a side effect of what I term “premature calculation”!
We also were told that the unemployment increase in August was “less bad” because the rise was less than what the economic analysts had originally forecasted. Tell that to the 216,000 workers who lost their jobs and the thousands of businesses impacted as a result.
So, the question I’ve been asked to address is which unemployment rate is the most relevant to the ARM industry. My answer: the one that represents the biggest impact to an ARM company’s liquidation performance.
After reviewing the various unemployment calculations maintained by the Bureau of Labor Statistics, I have come to the conclusion that the U6 calculation (Unemployed, discouraged and underemployed workers) is the most relevant, which increased 0.5 percentage points in August to a whopping 16.8 percent, representing a total of roughly 20 million people in the U.S. And remember, this is “less bad”. I like that the U6 number includes underemployed workers, because these are people that have jobs but aren't making as much money as they are accustomed; they have been forced into part time work. This can impact payments to ARM companies.
So, what should ARM companies do with this information? Our recommendation is that executives of ARM companies, particularly consumer focused ARM companies, keep track of the unemployment rate because it can help them assess future changes in liquidation performance. If the unemployment rate is rising chances are that the future liquidation performance may decline.
Whether you believe the unemployment rate is 9.7 percent, 16.8 percent or something else the important thing to know is how it is changing over time. Feel free to give us a call and we will keep you apprised of changes in the unemployment rate and other key economic and market statistics that we believe are most relevant to the ARM industry.
Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.
What’s Next for Bankruptcies in the Current Economy
One of the items we are asked most frequently is “how does the economy impact bankruptcies,” both in terms of volume, as well as in terms of liquidation. I wanted to share a few of the trends and observations we are seeing and communicating to our partners.
In terms of volume, bankruptcies are a lagging indicator on the economy. The thought process is really two-fold:
- First, folks will see a decrease in income or job loss, etc. They will then work hard looking for a solution to their problems, like another job or financial restructuring through debt settlement, refinance, or a myriad of other possibilities. In the mean time, the lack of health insurance or other factors causes their out of pocket non-discretionary spending to rise. Bankruptcy tends to be a last resort on the part of most debtors, so by the time they are filing, they just can’t hold it together any longer. However, the economic cycle that led to the start of the debtor’s financial crisis probably started months ago, since the bankruptcy lags the economic cycle by some months. This is very much the case in the macro-economy.
- Debtors won’t file bankruptcy unless they have something to protect; be it wages, a house, or business assets. Thus, the unemployed renter with no real assets is not likely to file for bankruptcy. However, once he or she gets a job where wages can be garnished, they certainly may have to file at that point. Thus, we will likely see another wave of bankruptcies as job losses stop and the unemployed enter the workforce again.
In terms of liquidation, debtors who are making less have lower disposable incomes, and thus lower plan payments in bankruptcy – particularly to unsecured creditors. If a debtor loses their job, or has a major financial setback, this will also cause an increase in conversions to Chapter 7, plan amendments to lower payouts, or dismissals of the bankruptcy account.
What we are sharing with our partners is that based on what we are seeing, the bankruptcy volume is likely to continue upward for several more quarters, and that assumes that the economy is stabilizing and begins to slowly improve. The liquidations for unsecured creditors are likely to remain lower than we have seen historically, as consumers restructure their debts in bankruptcy while struggling with a sluggish economy, lack of real wage growth, underemployment and a very tough family balance sheet.
Longer term, the future is very difficult to predict. The consumer and financial institutions have presumably learned a valuable lesson about the dangers of debt, and it is likely that financial institutions will tighten underwriting, and the average consumer will be more prudent managing their assets and liabilities. That prudence likely will lead to sluggish growth because of lower demand for assets, and lower supplies of debt. Coupled with what our economic team is predicting as a relatively high interest rate environment in the next couple of years, that is a recipe for fewer bankruptcies, but lower payouts for those that do file. Additionally, there is likely to be a bias toward Chapter 7 as incomes fall and the means test becomes less of an issue, and more of the value of business and real estate assets fall under state exemptions due to recent deflation.
As we learned over the last several years, the one thing that economists can do very well is get things wrong. We’ve been advising some of our partners to consider looking at servicing options if their risk tolerance is relatively high – as the uncertainty is being reflected in the asset prices traditional debt buyers are willing to place on flow deals.
Bankruptcies are a lagging indicator of the health of the economy, and the health of the debtor. Once you see bankruptcy liquidations and volumes turn, the end of the recession is past for certain. The historical lag may not be a good predictor due to the severity of the current economic downturn, but we are forecasting a 2 to 4 quarter lag – so there is still a pretty long bankruptcy runway ahead in 2009-2010.
Edward J. Barton is Chief Executive Officer of B-Line, LLC. Ed joined B-Line as Controller in 2001 and was appointed Chief Financial Officer in 2002 before being promoted to Chief Executive Officer in 2008. Ed, a CPA and CFA, received an MBA from Syracuse University and a BBA (magna cum laude) from the University of Notre Dame. He then went on to become the Director of Finance (Western Region) for Luminant Worldwide Corporation. He has been vital in the development of cash and recovery models, policies and procedures, financing, financial statement preparation and review, human resources, client audits and investor relations.
Faltering Banks Create Challenges for ARM Companies
While the economy may be showing early signs of stabilizing, the banking industry continues to worsen. In data released late last week, federal regulators added 111 troubled banks to their endangered species list, bringing the total number to 416. This amount is up nearly 4 fold from a year ago, despite the trillions of dollars the government has thrown at the problem. Regulators have shut down 81 banks so far in 2009, and some analysts predict hundreds more banks will be added to the list before it is all done.
What does this mean for many companies in the ARM industry who service bank clients or rely on bank financing for operating capital or expansion?
The most immediate effect will be continued difficulty in obtaining financing. The effects of this credit crunch on the U.S. ARM industry are widespread and will continue well into 2010. Georgia, California, Illinois, and Florida have been hit the hardest, accounting for 50 percent of the bank failures since 2008.
Local banks, once a safe and reliable capital resource for many small and mid-size companies, have tightened their lending requirements to a point where it is virtually impossible for companies to borrow to finance operations or growth. As a result, those companies that rely on bank financing are adjusting their business development strategies in the short term or seeking alternative funding sources ranging from friends, family, and high net-worth individuals to venture capital, private equity and strategic partners. Those companies that planned ahead and are well capitalized are staying the course, negotiating good deals and capitalizing on the expansion opportunities they see in today’s dynamic market.
There are other ramifications to keep in mind as bank failures increase:
- Short-Term Increases in Consumer and Commercial Loan Defaults - Without access to additional financing, default rates among consumer and commercial borrowers will continue to rise, continuing to increase placement volumes and challenge recovery efforts.
- Placements Will Decrease in the Future - Placement levels in select asset classes will level off and possibly drop over time as some credit card issuers and lenders curtail their lending.
- Portfolio Prices May Decline Further - With limited financing options and concerns about future performance, pricing for many portfolio sales will remain at current levels and possibly decrease, resulting in less auctions and more one-off negotiated transactions or no-trades.
- More Distressed ARM Situations Will Occur - Capital constraints and poor performance will force some companies to break loan covenants, resulting in more distressed M&A transactions and some bankruptcies.
- Local Banks Will Merge - Another round of consolidation among local and regional banks will occur.
Summer Vacation: A Real Break, or Change of Scenery?
Taking time off in the summer is as common as the common cold. Just as the change of seasons brings on the sniffles for many of us, the summer months are a time to pack up our cars and leave our office behind, heading out for some fun and sun. Some of us head out to our favorite destination in June right after school ends, while others prefer to wait until August, venturing out just before school starts up again and clients expect us to be in our offices.
Any way we do it, most of us take a summertime vacation. The intention as we head out is always the same. We want to leave the daily grind behind, spend quality time away from our office, recharge the proverbial batteries, and come back fully rested and ready to embrace the challenges of the real world all over again.
The question I want to raise is: do we truly take a vacation, or do we remain focused on our work – or worse – do we stay completely connected while we are away from the office? Are we able to allow ourselves some time to take a well deserved mental break from our work-related commitments and focus on ourselves, our loved ones, hobbies, or whatever else we strive to do when we are away from our desks? Or, do we physically leave the office for a period of time, call it a vacation because that’s what our significant others and kids want us to do, but remain completely connected to our clients and colleagues while we are away?
Sure, we all have good intentions when we begin our vacations. We intend to relax, catch up on our reading, or simply enjoy the freedom from our daily planners for a short while. But how many of us truly stay away while we are away? Technology allows us to remain connected in so many ways that has become impossible to completely check out of the office – even for a relatively short period of time. Cell phone networks are stronger than ever, so there are few places we can hide. And cell phones are no longer just simple calling devices. They allow us to take our office along with us, empowering us to check email, download attachments, text message, and check websites. If that’s not enough, our laptops with wireless connections are not far behind us – either in the car or on our kitchen tables, ready to go on a moment’s notice.
I confess that I find myself trapped somewhere between the workaholic and true vacationer while I am away from my office. During my vacation week, I spend quality time with my wife and children without my Blackberry attached to my hip. But I also make business-related calls, read email, examine spreadsheets or plan for our latest venture. What about you? Are you truly away from your office when you’re on vacation or are you so attached that when you return you don’t feel like you were really on vacation at all? Are you somewhere in the middle like me? Chime in and let us know. It’s OK to be honest. Your family and colleagues know the truth anyway.
