ARTICLE...
Sale or Return?
Casting an eye over the rise of debt sale and purchase.
Debt Sale has come a long way since the first tentative steps were taken just a few years ago. What was once quite radical is, in certain areas at least, now almost mainstream, a fact evidenced by its continual growth.
In 2006, around £7 billion of debt was sold; for 2007, this figure might be anywhere between £8 billion and £10 billion, and predictions for 2008 suggest the figure could be higher still, assuming the current credit squeeze does not impact the banks' ability to fund purchasers as they have previously.
The reasons for such significant growth are many and varied. James Cornell, CEO of The Lowell Group puts it down to increasing consumer indebtedness and, more recently, rising default levels.
He explained: "Banks and other credit providers have developed debt recovery strategies that increasingly focus on debt sale rather than third party debt collection to manage non-performing portfolios.
"This change of strategy has been driven by a reduction of administration costs, earlier recognition of recoveries, and crystallisation of the value of the delinquent debt."
Ken Maynard, CEO of Cabot Financial, concurs. He added: "the advantages for banks from debt sale remain strong even in the wake of the credit crunch. Managing the recovery of delinquent debt takes up valuable business time and can also rack up expensive legal costs. Debt sale can reduce these internal costs as well as provide an immediate injection of cash to increase a business' liquidity."
Nearly all major lenders now sell debt, with the most active sellers being those in the credit cards and loans business. Banks are also selling major portfolios of debt including current accounts.
Ken continued: "Mortgage lenders have been slower to engage in debt purchase, although this is starting to change and there are still considerable opportunities within mobile phone and utility debt. The sale of commercial and local government debt portfolios may also be possible as the industry matures."
Cornell also sees opportunities both in utilities and the public sector. He said: "Historically, utilities debt has been regarded as unattractive due to poor quality of data, low balances and the high proportion of 'gone-aways'.
"Public sector debt is potentially more attractive but current legislation does not allow government agencies to sell."
Cornell and Maynard also agree that recent regulations, notably Basel II, have also strengthened the case for debt sale. Maynard added: "Outstanding unsecured loans tie up a bank's capital without adding value, so selling them is an effective way to free up capital for more beneficial uses."
A principal reason for the continued success of debt sale is that issues of 'trust' between buyer and seller have been largely overcome, especially in relation to protecting the seller's reputation.
David Berry, Managing Director of The Lewis Group, believes there is another reason: "Sellers are being greatly assisted by the high prices that debts are now realising," he said.
"If they want such prices to be maintained, however, then buyers are going to have to work much harder with the debt, and that means opening up the option of selling the debt on to a second purchaser."
Of course, with reputations paramount, some sellers would recoil in horror at the thought of a debt being sold on to yet another party. But not all sellers feel the same way.
"In a contract, recently, from one of the major players, provision was made and specific clauses added to enable the purchaser to re-sell the debt if they wish," Berry added, "Of course it required the buyer to obtain the express permission of the seller before doing so, but it also stated that such permission should not be unreasonably withheld."
Philip Lunn, CEO of Aktiv Kapital, has knowledge of similar practices. He explained: "It is a statement of fact that most recent contracts have a provision for secondary sale if we want to, although of course we have to seek the original seller's authority first. From a practical perspective, we haven't yet sold anything on ourselves.
"The issue of reputation is an interesting one," he continued, "It is not just the seller's reputation that is at risk, but also our own. Secondary sale brings in new levels of risk not just to the original vendor, but also the original buyer. And our reputation is just as important."
Berry thinks that some sellers' contracts are too prohibitive, and in effect restricting growth. With the costs of portfolios rising significantly, it is difficult for smaller operators to enter the market, unless they can buy secondary debt.
And Ken Maynard agrees. "In the short term, debt purchase will be a difficult place for new entrants and those existing players who do not have sufficient access to finance," He added, "But for established purchasers who can demonstrate strong data quality, have a proven track record and an appropriate customer ethos, the potential for growth in the longer term remains positive."
by Leigh Berkley, Chairman of the Debt Buyers and Sellers Group (DBSG)
Original article courtesy of DBSG. For further information visit www.dbsg-uk.com.
