The debt buying and selling industry has undergone significant changes in the last year as a result of the economy, credit crunch and the regulatory landscape, all of which were touched upon Thursday at ACA International’s Fall Forum in Chicago.
Today’s asset purchase and recovery management business is quite different than it was when we entered it, noted Steve Leckerman, executive vice president and chief operating officer of NCO Financial Systems, Inc.
Only 20 years ago, the average primary fees were in the low 30 percent range; the secondary fees consistently were 50 percent. Recovery percentages were in the mid-to upper 30 percent range and the secondary recoveries averaged about 6 percent, according to Leckerman.
“Average balances at placement were around $400 and insurance recovery could make up more than 60 percent of the dollars collected for clients in primary collections,” Leckerman said.
The industry itself had less focus on compliance; more volume, higher commissions and higher liquidations. More clients were selling and more agencies were in the network receiving business. Money was available for the consumer to borrow.
Debt buying was a robust segment of the business with willing buyers and willing sellers. Both large and small debt buyers did well.
Between 2005 and 2007, the collection industry was flat even though consumer debt and delinquencies had grown to unprecedented levels.
“There’s a perfect storm going on right now,” Leckerman said, pointing to the debt, delinquencies, recession, reduced credit availability, low consumer confidence and the complex regulatory environment.
“If you do business with large banks, utility companies or other large firms, they are looking to cut costs; health care is fearful of rules changing,” Leckerman said. “You’re working with more middle-class debtors. They’re more sophisticated consumers, so they will file more complaints. We have attorney creditors who are like regular customers.”
Competition is fierce in this type of environment, Leckerman said. “In today’s environment, an agency needs to deliver consistent best performance. Second is not good enough. You have to be able to adapt to clients’ ever increasing demand for data. They want performance metrics down to metrics for the employees.”
Leckerman also encouraged the audience to protect their clients’ brands and to seek to be an industry leader.
To succeed in the industry today, Leckerman said, a firm needs to have a winning attitude; accountability at every level; the right strategy; flawless execution, even on “the small stuff;” face time with regulations and have a self-regulation initiative.
Valuation and Divesting
Among the common threads of many of the deals so far this year, according to Brian Greenberg, managing director of Greenberg Advisors, LLC, is that more distressed companies are seeking liquidity and debt buyers are seeking debt/equity funding partners.
Greenberg added that investors are seeking portfolios offering growth of at least 15 percent annually and similar performance in terms of profit margins. But the investors won’t take the buyers word for past performance, investors want substantive proof.
Investors are also interested in business partners that offer a niche focus or some type of differentiation from other potential acquisitions. An excellent, tenured management team, efficient technology, good analytics and “sticky” clients are other attributes investors are seeking.
“Due diligence is more intensive today,” added Robert Castle, managing director, investment banking, for Northland Securities, Inc. “Check with your advisors [before a transaction]. There is no such thing as being over-prepared.”
As compliance and regulation continue to become bigger factors and consume more of a firm’s resources, it will become increasingly difficult for small and mid-sized companies to compete, Greenberg and Castle added. One factor that could affect the timing of some deals in the next five quarters is the change in capital gains taxes, which they expect will take effect after 2010.
Debt Buyer Licensing
Companies making acquisitions should closely examine state laws, particularly if a transaction brings them into new locations, advised Valerie Hayes, ACA International vice president for legal compliance and government affairs.
Each state has its own rules for the licensure of debt purchasers (there are a couple without specific rules), Hayes said. Among these rules is the actual definition of a debt purchaser.
“Some states differentiate between active and passive debt purchasers,” Hayes added. “You need to be aware of the guidance provided by state regulators in interpreting licensing statutes.”
For example, in Connecticut, state law prohibits “consumer collection agencies from purchasing or receiving assignments of claims for the purpose of collection or to institute suit.”
Loss Prevention Techniques
One of the biggest factors in avoiding unexpected losses in debt purchase transactions is to use carefully drafted contracts, said Hayes and Janis St. Martin, administrative vice president for the Collector’s Insurance Agency, Inc., a subsidiary of ACA International.
In reviewing these contracts, firms should seek legal assistance and conduct thorough due diligence, Hayes and St. Martin advised, recommending that thorough due diligence firms review contracts executed by others.
They also recommended that debt buyers and sellers pay particular attention to the hold-harmless clause and the liability assumed or transferred in the contract. Debt owners are routinely named in lawsuits against collection agencies.
Collectors Insurance Agency offers liability insurance for contractual liability. Errors and omissions insurance can also mitigate some of the risk in debt transactions.