NEWS...
The Outlook for Debt Purchasers?
The fallout of the credit crunch continues to circulate the market, with new statistics predicting increasing numbers of bankruptcies and repossessions on the way. But what effect are these problems likely to have on the debt purchase sector?
Depending on who you ask, the outlook for debt purchasers varies widely. With debt sales expected to exceed £9bn face value this year, the market remains buoyant and lenders continue to want to offload more debt.
However, the Governor of the Bank of England's comments forecasting an economic slowdown have added fuel to some commentators foretelling a full-blown recession; it seems certain that the collections environment is set to become increasingly difficult.
In addition, banks are becoming much more cautious in the degree of finance they are prepared to offer to individuals and businesses, which affects debt purchasers on two levels.
In the short term, debt purchasers will find it harder to finance the acquisitions of portfolios because, as with other business customers, lenders are looking closely at a purchaser's track record as a determining factor in deciding whether to renew existing facilities and on what terms. Increased lines of credit or new facilities are even harder to obtain.
Against this backdrop, we would expect the rate of new entrants to the market to slow down, with the number of buyers potentially falling. The inability of some purchasers to compete as effectively as before is certainly likely to create opportunities for those companies that are well funded and will hopefully drive down prices - although we have not yet seen a wholesale move to softer prices.
The banks' tighter lending criteria is also affecting to individuals as a consequence of their policy to increase the quality of loans and decrease their exposure to those with poor credit records. At the same time, consumers are re-assessing their debt exposure and taking a more responsible approach to both new and old debts.
In the longer term, if fewer debts are being agreed and requested, could we see lower volumes of debt for sale going forward? Purchasers are also facing legislative challenges as the final provisions of the Consumer Credit Act 2006 come into force.
From 1 October 2008, the legislation requires lenders to provide debtors with much more detailed information about their accounts, including annual statements and regular notices when consumers fall into arrears or incur a default sum, and these responsibilities will have to pass to the purchasers when portfolios are acquired.
There has also been a growth in the use of ill advised consumer websites where dissatisfied debtors can exchange often inaccurate, but plausible, information on avoiding payment of debts. Most lenders and purchasers see this as merely a tactic to delay payment, but it adds to the increasingly difficult collection environment.
Half-way through 2008, it is clear that these are challenging times. The industry has changed a great deal in the space of just one year, but where there is change, there is also opportunity. Debt purchasers who take a prudent approach, have adequate funding and have a sound track record should be able to weather the current market.
by Ken Maynard, Group Chief Executive, Cabot Financial Group.
Original article courtesy of DBSG. For further information visit www.dbsg-uk.com.
