NEWS...
Expanding to Non-financial Sectors
Ken Maynard of Cabot Financial explains how his organisation has developed in time with the industry.
"Cabot Financial has been active in the debt purchase market for around 10 years and in that time the nature of the business has changed dramatically.
"The market began with the sale of financial debt portfolios, but has since been expanded to include non-financial debt, such as utilities, commercial and even government debt.
"Debt purchasers have built up a vast amount of experience with regards to consumer loans and credit card debt and this knowledge is now being applied to help companies outside of financial services to rid themselves of non-performing debt. Existing business models, set up to provide a market for the sale of financial debt, have been adapted to include any form of delinquent debt. While financial sellers have used debt sale as a way of clearing bad debt from their balance sheets for some time now, increasingly, the public sector, utilities and the telecoms sectors are following suit.
"Recent changes in the utilities market have meant that debt sale is a particularly attractive prospect for companies within the sector. Decreased regulation has led to increased competition which, along with the impact of privatisation, has forced utilities suppliers to focus on their financial performance. The management and recovery of bad debt is a time-consuming and costly exercise, therefore, debt sale is a useful vehicle for utilities companies to free up resources, as well as providing an immediate cash injection.
"The debt sale market is based around two types of transaction. 'Spot' sales are one-off transactions between the buyer and seller relating to an agreed portfolio of debt, while "forward flow" transactions take a more long-term view to debt sale. With the latter type of transaction, the seller can structure a series of debt sales of as yet unidentified debt portfolios over a pre-determined timeframe. Only the characteristics of the debt to be sold are agreed up front and the seller then commits to selling these types of portfolios to the buyer periodically over the term of the agreement.
"So far, the UK utilities market has largely seen spot debt sale transactions but as the general debt sale market matures, this is expected to change. For many years, utilities companies have used third-party collections agencies and debt sale is now seen as the next logical step, allowing for improved cash flow and lower administration costs. Essentially, the reason that debt sale is so attractive, is that companies are able to focus on their core business without diverting resources into an area where they lack expertise.
"While there are undoubtedly similarities between non-financial debt sale, and the more established sale of loans and credit card debts, these new sectors do require a degree of sector-specific expertise in order to service the portfolios efficiently. For example, delinquent gas customers often question meter readings and usage reports from suppliers. Therefore, buyers need to be prepared to identify periods of gas supply and consumption levels. As a result, sellers may seek out debt purchasers with previous experience in servicing this type of portfolio. Currently, the number of purchasers with the resources and expertise to manage utility debt is fairly small, but as with other areas of debt purchase, the market looks set to grow as successful sales increase confidence in the process.
"As the market for non-financial debt sale grows in the UK, all types of companies who offer forms of consumer debt are realising the benefit of debt sale. With the current economic climate putting a tight squeeze on credit, now is the time for companies in any sector to look at ways of turning non-performing debt into cash."
Original article, by Ken Maynard, Group Chief Executive of Cabot Financial Group, courtesy of DBSG. For further information visit www.dbsg-uk.com/dbsg
