The Debt Purchase Market. October 2014

Transcription

1 The Debt Purchase Market October 2014

2 Background and History History of debt purchase odebt Purchase ( DP ) market has evolved and grown rapidly oin 2000 the market was predominantly agency collectors with few purchasers oover time, the need for Creditors such as banks to invest and specialise in recoveries has increased ofocus has been on unsecured consumer debt such as loans, cards, auto, utilities etc though Government generated debt will become a key market feature

3 Background and History owhy have creditors preferred to sell unsecured consumer debt rather than collect themselves?: Market size. Less than 5% of an unsecured loan book defaults although this accounts for c. 20bn pa across the sector in the UK Customer priority. Defaulters often less of a priority than profitable relationships (multi product relationships are more difficult) Specialism. Pursuing defaulted debt requires complex activities including trace, affordability analysis and negotiations. These skills are not always contained within financial service organisations

4 Background and History owhy have creditors preferred to sell unsecured consumer debt rather than collect themselves?: Economics. The specialist nature of DP s, and ability to drive higher returns than in-house DCAs allows the DP s to pay a higher price Collections experience. Collection standards have increased as the businesses professionalised Infrastructure investment. Enables creditors to reduce investment on collections systems

5 Background and History oin terms of the unsecured lending market, gross new lending increased from 249bn in 2003 ( 180bn financial services) to 328bn at the peak before the 2008 downturn. The market has now returning to pre-crisis levels onew defaulted debt increased from 12bn in 2003 to 23bn in 2010, falling to 18bn in 2012 due to the crisis. Debt sales grew from 1.5bn 2003 to 8.6bn in 2008 (face value) oinitially vendors de-levered their balance sheets by selling debt obtaining high prices. New liquidity entered the market increasing competition for the debt

6 Background and History o2011 the market recovered. Larger, well funded DP s (Cabot, Lowell, Arrow) prospered through scale efficiencies, data advantages, buying power and customer touch points oremaining inventory is substantial oindustry consolidation. PE interest osecond mortgage market collapse in 2008 prevented people refinancing obarriers to entry for the sector are higher than ever with compliance, funding and regulatory requirements tightening

7 Sector Drivers The market onew investors attracted into the marketplace as the volume of debt sales increased odebt is purchased by 3 broad groups: odebt funds. Funds such as Apollo, Carval, Blackstone and Anacap who outsource collections olisted entity. Listed businesses (Arrow, Encore, PRA) and specialist operations of larger groups such as Paragon oprivate equity. Independents such as Lowell (Ontario Teachers Pension Fund recently acquired a stake), CapQuest, Hoist oconsolidation remains a theme; UK market has gone from c.25 players in 2008 to c.10 today. Further consolidation is expected

8 Sector Drivers oconsolidation is driven by oavailability of funding othe need for scale to drive economies othe need for better data management allowed by a greater number of people to collect from and IT spend omaterially increased compliance and other regulatory costs osome DP s have become so called zombie companies having had funding withdrawn; consequently they are no longer purchasing portfolios and are in run-off

9 Sector Drivers ocollection specialism has become a theme (primary, secondary, trace, legal etc) oit is expected that further market consolidation will occur in the UK and across Europe odps will continue to list as public companies ous players will continue to look to Europe as the US turns ex growth omore UK players will look to Europe for growth following in the steps of the debt funds omore cross border consolidation in general

10 Sector Drivers Funding oas the debt purchase industry developed banks offered senior debt facilities to enable them to purchase non performing portfolios ofollowing the financial crisis the number of banks offering this type of facility diminished severely leading to a liquidity crisis obarclays, who were the market leader, exited entirely. Other banks withdrew liquidity oin addition, in the UK the ability for a customer to refinance their home using a second mortgage also effectively ended. This was a primary way of repaying monies owed to DP businesses othe liquidity crisis led to a number of businesses stalling and market consolidation

11 Sector Drivers oin 2009 liquidity started to return to the market in limited amounts using borrowing base facilities ocapital market activity has become key in the DP space driven by quality cash generative businesses and a real money investor base seeking yield ohigh Yield Bonds (HYB) are now relatively common place in the market othe tenor, rate and ticket size are all attractive. Also, the ability to tap a bond to raise additional debt is a useful feature

12 Sector Drivers osuper senior RCF loans are often used in conjunction with the HYB ohigh Yield is almost a misnomer. Spreads are very attractive currently oa more recent development within the market was the IPO of Arrow, one of the larger DP s within the UK. It is expected further DP s will follow suit in coming months in line with the developments of the very established and sophisticated US market othere has been a clear shift within the sector to capital markets for the larger more sophisticated players

13 Sector Outlook Outlook and risk drivers opositive outlook for the DP industry with additional incoming acquirers and pan European industry consolidation othe outlook for DP spend on debt to grow at 15% pa reaching 1,1713m in 2017 ostructural drivers of growth are expected to be enhanced in the in the short to medium term by sales of the backlog of defaulted debts accumulated during the recession ooriginators expect growth in defaulted debts as looser lending criteria feed through into recoveries books othe outlook for pricing is increases driven by a combination of change in mix of debt sold, improvements in DP collections techniques, and an increase in competitive bidding intensity between DP s

14 Sector Outlook ogrowth Prospects for sales of semi performing debt are stronger, at 16% pa and to account for 800m, 47% of total DP spend on debt, by 2017 ooriginators face strong regulatory and reputational drivers to continue their policy of forbearance towards defaulted loans, which is expected to maintain a supply of new semi-performing accounts to recoveries books ooriginators historical caution towards sales of a wider range of debt types (beyond aged non-paying debts) is expected to change as they better understand the risks and benefits, and from pressure to manage recoveries books more actively (e.g. in response to higher capital costs from regulation such as Basel III)

15 Sector Outlook othe risk of a market discontinuity is considered lower than in , particularly for semi-performing debt othe professionalism of debt sales since the credit crisis mitigates the risk from more onerous regulation, whilst DP consolidation means that leading DP s would be stronger positioned in a future recession othere have been concerns in the market over recent bidding wars which have in turn pushed up the prices of portfolios further squeezing out the smaller players with little or no access to the cheaper funding seen across the market othe market has also seen a move towards European markets with the likes of Arrow increasing their purchasing within Portugal this has been coupled with the entrance of US interest within the UK as seen through Encore s recent purchase of Cabot oa key development was the direct equity investment made by The Ontario Teachers Pension in Lowell unthinkable 10 years ago

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