You know things are bad when even the bill collectors are gloomy!
Debt collection challenging in slow U.S. economy
February 12, 2003 10:24:00 AM ET
By Richard Leong
NEW YORK, Feb 12 (Reuters) - The U.S. debt collection
industry is facing an uphill battle as more debt-heavy
Americans struggle to keep up with their car payments and
credit card bills.
Credit card companies and other lenders likely will be
saddled with more losses in 2003 from rising bad loans.
Americans are poised to file bankruptcy in record numbers this
year, surpassing the all-time high of 1.5 million in 2002,
according to the American Bankruptcy Institute.
Blame it on massive layoffs, a three-year stock slump,
rising fuel prices and a looming U.S. war with Iraq.
U.S. consumers, after piling on debt in the late 1990s, are either struggling or reluctant to pay off their bills.
"It's tough to get money out of people because of the
economy," said Brian Callahan, director of financial reporting at NCO Group Inc.(O:NCOG), the world's biggest debt collector, based in Fort Washington, Pennsylvania. "People are nervous about their future cash positions."
Demand has been rising for collection firms' services.
Companies have been pressing harder to collect from delinquent customers.
While business volume has grown, the industry's profit is being squeezed as firms spend more time and money pursuing delinquent borrowers.
"It's been more costly to collect," said Gary Weller, chief financial officer at Outsourcing Solutions Inc., based in St. Louis. "Our margins are lower than where they had been because of a difficult collection environment."
The $11 billion industry is not without its bright spots. In November, Portfolio Recovery Associates (O:PRAA)
launched a successful initial public offering. Its shares have been trading 50 percent above its debut price of $13.
Some collection specialists that buy bad loans and
receivables at sharp discounts, like Cavalry Investments LLC, say their business has thrived. They have snapped up the flood of discounted loans and receivables sold in the open market at about five to 10 cents on the dollar by credit card companies, utilities and hospitals.
But analysts warn that if the economy continues to limp
along, such a strategy could falter as expected profits from
recovery on those loans fails to materialize.
BOTTOM OF FOOD CHAIN
Americans' credit binge, despite 40-year low interest
rates, subsided late last year. On Friday, the Federal Reserve said outstanding U.S. consumer credit, including car loans and credit cards, fell by $4 billion in December, the biggest monthly decline in 12 years.
But so far, this borrowing cutback has not precipitated
higher debt payments. In December, credit card companies wrote off bad loans at the second-highest rate in a decade, Standard & Poor's said last week.
"We are at the bottom of the food chain when it comes to
discretionary income," NCO's Callahan said. NCO reported on Wednesday that its net fourth-quarter income, excluding the amortization of goodwill, was $6.8 million, or 26 cents a share, down from $8.4 million or 31 cents a share year-ago. Analysts' consensus estimate was 29 cents, according to research firm Thomson First Call.
The company said consumer credit quality deteriorated in
the summer of 2000, prior to the dotcom bust a few months
later. "It's not similar to any downturn we have seen before," Callahan said.
Prospects for collection will likely stay difficult.
"I don't expect it to change this year," said Al Brothers, Cavalry's vice-president of acquisitions.
LOAN ACQUISITIONS
Privately held Cavalry has aggressively acquired assets
from the swollen supply of distressed consumer loans and
receivables. The principal balance of its portfolio grew to $7 billion at the end of 2002, more than double the 2001 level.
Buying bad loans, as Cavalry does, is a riskier strategy
than relying on collection fees because the buyer can be stuck with the loans if they cannot be collected, analysts said.
"It's riskier because you are putting up your own capital and taking on risks, like loss recognition," said William Sutherland, an analyst at Commerce Capital Markets.
In January, Cavalry hired Citigroup's (N:C) Salomon Smith Barney to find ways for the company to grow.
"Everything is on the table right now," Cavalry's Brothers said. That includes going public, selling securities or combining with another company. "We know that to continue growing, we need additional capital."
© 2003 Reuters |
