Each year since 2008, OC&C has offered an assessment of the health of the credit management and debt collection industry with its CMDC Index, which identifies not just the current leaders but the strategies likely to unlock future advantage.
Overall what we have observed has been a remarkable success story, with huge growth in revenue and profit, much smarter businesses, and a radically-improved level of compliance compared to the 1990s or early 2000s.
The businesses that we have ranked highly have all performed very strongly across financial, operational and strategic dimensions.
This year, we have chosen not to produce a ranking of the leading businesses in the way we have done previously. A combination of some very different accounting methods, some opaque reporting across multiple countries, and closer convergence of the strategies of the leaders, means that it would be very hard to distinguish fairly between the top few businesses.
The sector has now reached a fascinating point in its development.
The main waves of recessionary effects (funding shortages, vintages of debt that turned out to deliver super-normal profits, major interventions by regulators) have subsided, and the post-recession ripples, in particular the UK’s release of warehoused debt, have also calmed down.
A simple comparison of 2015 to 2010 shows that the 30 largest businesses collectively achieved £4.2bn revenue (up 70 percent over five years) and more than £800m EBIT (more than 60 percent higher than 2010 in absolute terms). By any standards, this represents highly attractive operating margins.
Yet although the market seems calmer, better understood and more accepted than ever, two very different interpretations of the current situation are possible.
One is a bull case, in which there is plenty of debt created, from multiple industry verticals, with acceleration expected when interest rates rise, and where stockmarkets and private funders alike are now very comfortable backing debt collection businesses.
Market-related risk has reduced too: Creditors across Europe are now so committed to working with third parties to resolve debt, and in some cases totally dependent on them, that it is hard to construct a downside case as severe as when debt sale in the UK halved in a single year during the recession.
The other is a bear case, in which tighter lending has choked debt creation to a structurally lower level than before, competition has squeezed profitability further and further down - a trend made worse by impatient investors wanting to see growth rates continue at the levels achievable in 2011 or 2012 - and governments and regulators turning the screw harder and harder on compliance. The latter has brought the industry to the point where even the largest businesses need to invest significantly to maintain the required standards.
The super league
Across Europe, there is no single winner that stands out clearly as better than the rest. What can be seen is a super league of nine businesses, all achieving upwards of €100m in revenue, whose scale and performance set them apart from the rest of the field. Strictly in alphabetical order, they are:
The majority of these already operate in multiple countries; Kruk is an interesting example of building enough scale in a single domestic market (Poland), to sustain a leadership position and, crucially for the longer term, to have the financial muscle to be able to contemplate challenging some of the others in new geographies should it choose to do that.
The quality of this group is extremely high, from Lowell, which historically has scored highest in this index more than anyone else, and which is now sharing its formidable skills with GFKL, to Arrow, which stood out for years based on the purity of its highly effective data-led model and was the first UK player to float.
All of them continue to invest significantly in operational improvement and new proposition development.
In financial terms too, the performance of the super league has been head and shoulders above the rest of the market – their revenue growth has averaged 15 percent pa, roughly twice the level of the rest, and they achieve profit margins close to 30 percent (again, virtually double what others have managed).
See Credit Strategy’s December issue for the full article on p21.