Debt Buyers Getting Creative to Fund Portfolio Purchases

The accounts receivable management industry is feeling the pinch of a prolonged recession like every other sector of the economy. And while access to credit is tight for most debt buyers, some are still finding money available to fund debt portfolio purchases.

One of the factors prolonging the current economic downturn is the drying up of credit markets due to major financial institutions’ capital liquidity pinch; put simply, banks are not lending to consumers or businesses because they don’t have the money. This impacts all businesses in the U.S., but it hits debt purchasers in a very direct fashion.
 
Bad debt buyers rely on financing to fund account purchases. Typically, a debt purchaser will have a credit facility with major lenders in place to fund purchases on a going-forward basis. The facilities are arranged for years at a time. When the company wants to make a purchase, they draw down on the lending facility or line of credit.

These lines of credit have remained relatively intact. Some have even been expanded. Portfolio Recovery Associates, one of the largest debt buyers in the U.S., reported in September that its credit facility had been expanded by $25 million to accommodate a new lender, JP Morgan Chase.

Other credit agreements have been imperiled. West Asset Management said in April that a change in the terms of its lending agreement caused the company to pull out of the arrangement (“WAM to Reduce Debt Buying in 2008 Over Funding Flap,” April 18).

The “good news-bad news” theme on funding was echoed at a recent meeting hosted by ACA International. Attendees at ACA’s Fall Forum in November agreed that portfolio purchase financing has been hard to come by lately (“Debt Buyers Discuss Falling Portfolio Prices and Funding at Forum,” Nov. 10).

Stewart W. Hayes, senior vice president at Wells Fargo Foothill Lender Finance, a provider of senior secured financing from $10 million to $1 billion and one of the speakers at the conference, said that lenders are taking a much more critical look at debt buyers and other prospective borrowers than they once did.

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The heightened level of scrutiny has led many purchasers no option but to get creative in attracting attention.

Major debt buyer Collins Financial Services announced late last month that it had secured debt financing from LBC Credit Partners, a mezzanine fund that provides privately negotiated loans to middle market businesses, (“Collins Financial Services Secures Debt Financing to Support Growth,” Nov. 25).

Collins CEO Robert DiGennaro told insideARM that his company had to go the extra mile to attract funding. “We had to create a good story for the funders,” he said.

DiGennaro hired an outside advisor to create a “book” on the company to pitch to funding sources. Even after all that effort, it still 3 to 4 months before they attracted attention. DiGennero noted that Collins’ reputation and longevity in the ARM industry was what ultimately tipped the scales on the deal.

While he said that it’s a “good sign that money is coming back into the [debt buying] industry,” DiGennero thinks that private equity and other capital sources are missing an opportunity by sitting on the sidelines.

“If you’re looking to round out an investment portfolio with specialty finance, debt buying is probably the best industry to put money into,” he said.

Mark Russell, director at ARM advisory firm Kaulkin Ginsberg, concurs. “Funding sources are eyeing debt buyers with too narrow of an outlook,” he said. Russell noted that investors are looking at horizons of 12 to 18 months. But debt buyers will see returns for years down the road on portfolios they buy today.

“Debt prices have been coming down for some time now,” said Russell. “It’s ironic that money was being pumped into this industry when prices were at historic highs, and now that prices are low, no one wants to fund debt purchases.” He said that there is plenty of money to be made on purchases made right now because when the economy recovers, collection rates will go back up.