changing face of debt purchasing, The
As we celebrate the end of 2007 and welcome in 2008, it seems an appropriate time to reflect on the huge changes that have taken place in the credit world over the last 12 months and consider what the debt purchase industry will look like in a year’s time.
Recent events in subprime lending in the USA have transformed the climate for those in the credit industry, creating pressure on the money supply. As the cost of finance becomes more expensive, there have been widespread reports of European banks following the lead of their American counterparts by tightening lending policies to try to avoid mass default.
Are the days of cheap credit over?
At the same time, data from a number of sources including the Land Registry for England and Wales and the Office of National Statistics suggests that the UK property market is starting to cool and inflation fall following five interest rate rises in the space of a year. It seems likely that faced with these twin pressures, the demand for credit will at least begin to level out. Some commentators are predicting that the UK’s love affair with cheap credit is finally coming to an end.
The crystal ball is cloudy
It is hard to predict at this stage what effect the credit crunch will have on debt purchasers. With the banking industry in turmoil and households struggling to meet their monthly finance commitments as interest rate rises begin to bite, debt sale may become even more attractive as a way to unlock valuable working capital and reduce the high internal costs of managing delinquent debt.This increase in supply may well bring about a natural correction in the over-inflated prices we have seen recently for portfolios, with rises of more than 50% over the last 24 months. However, it is also possible that an increase in supply of portfolios will stimulate new entrants into the market, driving demand for debt and maintaining the high prices.
Against this backdrop, the structure of the debt purchase industry itself is going through a period of change. It was announced recently that Lowell Group has been put up for sale, while the private equity backer of 1st Credit is rumoured to be considering a similar move. With a number of MBO deals across the range of sectors having failed recently, it will be interesting to see what happens in these cases.
So, what are my predictions for the next twelve months – are we facing a new era for debt purchase? Like everyone else, I’ll have to wait and see what happens in the short term, but over the longer term I believe the potential for debt sale remains enormous.
Regardless of our future attitude towards borrowing, total personal debt in the UK already exceeds £1,300bn according to the Bank of England and we owe twice as much in non-mortgage debt as ourWestern European neighbours. In addition, the potential to broaden the market from mainly unsecured consumer credit products, to include mortgages, utility debt, insurance premium portfolios and medical insurance debts, offers considerable opportunities for established players.
For purchasers who can ride out the uncertainties of the current market and offer sellers the reassurance of longevity, strong data quality and a customer ethos that supports their brand, the opportunities are huge.
By Ken Maynard, Chief Executive Officer, Cabot Financial (Europe) Limited
Ken Maynard is Chief Executive Officer, Cabot Financial (Europe) Limited.
Further regular features on debt sale/purchase will appear in Credit Management throughout 2008.
Copyright Institute of Credit Management Ltd. Jan 2008
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