After the UK’s largest debt purchasers published results for the first quarter, Marcel Le Gouais assesses what the figures indicate about the market so far this year.
First quarter trading statements for the country’s biggest debt purchasers were published in May and June – and they provide a fair barometer of activity in the UK debt sale market.
As one would expect, because the three largest – Lowell, Cabot Credit Management and Arrow Global – are so well funded, the sky-high prices they’re spending on non-performing portfolios (and increasingly, paying books), stand out prominently.
But other elements are evident too – such as the growing cash collections on owned portfolios, the economies of scale and evidence that consolidation in the UK collections market still has some way to go before levelling off.
With both private and public sector sellers bringing significant deals to market, perhaps the industry can expect the figures for EBITDA and estimated remaining collections (ERC) for the top three purchasers to continue growing this year.
As well as big banks coming to market, such as HSBC, the Student Loans Company will also continue the £4bn sale process this year of part of the student loan book. The sale, expected to take several months and likely to continue after the election result, covers loans issued under the previous system that operated until 2012. Specifically, it will include the accounts of customers who entered repayment between 2002 and 2006. The sale will involve securitising the remaining future repayments on the loans and selling securities representing the rights to these to a range of purchasers.
Where that leaves debt purchasers that will have shown interest in the book will be an interesting case in point, but nevertheless their typical sources so far this year from financial services, utilities and telcos are providing ample opportunities.
In one example, Cabot invested a gross amount of £57.9m in loan portfolio purchases during the first three months of 2017, compared to £68.3m for the same period last year. Lowell made £36m of purchases in the same period while Arrow posted £77m of “organic portfolio purchases”.
The top three are also increasing cash collections levels on owned portfolios. Lowell reported debt purchase gross cash collections of £119.6m in the first quarter, a rise of 31.9 percent year-on-year.
Collections on Cabot’s owned loan portfolios reached £96.6m in the first quarter – a 10 percent rise on last year.
In the results statement Ken Stannard, chief executive of Cabot, said: “This has been another strong and profitable start to the year with our EBITDA increasing 18 percent compared to the same period in 2016, from £56.9m to £67.4m.”
He added: “We have also successfully acquired a UK-based debt contingency business, Orbit, and obtained regulatory approval for our Irish business, Cabot Financial Ireland, on May 5.”
Orbit, which works with some of the UK’s largest water suppliers including Yorkshire Water, Southern Water, United Utilities and Anglian Water, marks the latest addition to Cabot’s acquisition trail after buying out Dlc, Spanish debt servicer Gesif and Mortimer Clarke all in less than two years.
The flipside to the purchasers’ first quarter statements is the “sky-high prices” for portfolios in the UK market that are often remarked on privately, though noticeably, Lowell has consistently said in recent updates that its data analytics is underpinning a “disciplined approach to pricing and investment”.
But with a few major purchasers refinancing in the past year, perhaps the cost of funding has reached the stage that such high prices are sustainable for now.
Some of the recent quarterly updates also give indications about the changing nature of portfolios being sold. As was predicted in some quarters, there has been an uptick in paying portfolios in recent deals. Cabot’s statement particularly reflects a marked increase in the amount of paying portfolios coming to market. In its debt purchasing activity in the first quarter of 2017, 77 percent of the portfolios were paying books, compared to 41 percent for the same period in 2016. In contrast, some 23 percent of portfolios Cabot bought in January to March comprised non-performing loans, compared to 59 percent a year ago.
As well as paying portfolios, the picture that emerges in aggregated findings from Credit Strategy’s own surveys of last year’s Credit 100 (as of March, this index became the Consumer Credit 100), is that portfolios will include increasing amounts of accounts in early arrears.
Last year’s Credit 100, a group made up primarily of banks, utility firms, alternative lenders, telcos and debt purchasers, were asked in our regular surveys about their propensity to sell early arrears accounts.
Members answered questions on whether they plan to escalate or cut back the amount of early arrears accounts that they either outsource or sell. As many pundits will have foreseen, creditors will broadly increase this activity or at the very least, maintain it at current levels.
Some 33 percent of respondents, all of whom work within large, household name creditors, said they would increase the level of early arrears accounts that they will sell to debt purchasers this year, while 67 percent said they would maintain current levels of early arrears sales. None said they would decrease this activity.