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Author Topic: Leaders of the Pack  (Read 4328 times)
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« on: August 25, 2006, 09:26:23 AM »

Debt Buyers: Leaders of the Pack

From suijuris.com

Heeding the adage “slow and steady wins the race,” today’s leading debt buyers pulled ahead of the pack by setting a deliberate purchasing pace – careful to avoid the big-spending dangers that knocked off a pair of former giants.

Still, most of the top volume debt buyers are purchasing more and boasting revenue gains compared with two years ago, when Collections & Credit Risk last polled companies about their buying habits. Results of the latest CCR survey are included in the 2004 edition of Collections Source 1, CCR’s online database.

The changes mostly have been gradual year-to-year increases – nothing like the careless spending that now-defunct Commercial Financial Services practiced before burning out in 1999.Tulsa, Okla.-based CFS closed amid scandal (see Credit Scope, Page 11) and was followed 18 months later by the collapse of Creditrust Corp., which had taken over the role of top debt buyer. After an adjustment period, when buyers had to convince sellers to venture back into the debt-buying waters, the debt-sales market today is arguably stronger than ever.

“There’s a lot of stability. A lot of the guys who have been around doing this work are respected and have gained the trust of sellers ten times over,” says Carl C. Gregory, president and chief executive of Encore Capital Group, the parent company of debt buyer Midland Credit Management.

The top of the new buyer rankings resembles the top of the previous list, but there are new faces. In the debt-purchasing ranking, Sherman Financial Group, based in New York, leads the way with $7 billion acquired in 2002 – impressive growth from 2000, when it bought $4 billion.

Two insurance companies own a majority stake in Sherman, with management holding the remaining shares – a setup company officials say gives Sherman access to deep financial pockets.  

Next in line behind Sherman are Asset Acceptance LLC, based in Warren, Mich.; Unifund Group, based in Cincinnati; and Cavalry Portfolio Services, based in Phoenix. Asset Acceptance failed to make the top five in 2000, but vaulted into second place in 2002 after buying $5.2 billion in debt. The company made headlines in October by filing a $115 million Initial Public Offering with the Securities and Exchange Commission, a move that solidifies its ranking among the industry’s giants. Unifund, the leading buyer four years ago with $5.1 billion, bought $4.8 billion in 2002. Cavalry purchased more than $4.1 billion in 2002.

When CCR last surveyed buyers, the sagging economy, pending bankruptcy legislation (still being bandied about by the Senate), privacy debates, and market instability caused by the exit of CFS, kept the makeup of the debt-buying market leaders fairly constant. A wait-and-see attitude prevailed.

But now, a flood of new funding and interest in expanding the market beyond traditional credit card debt purchases has fueled a belief that plenty of money is still to be made. There’s also been a surge in smaller buyers and contingency firms dabbling in the buying business.

The successful IPO of Portfolio Recovery Associates, based in Norfolk, Va., may have spurred interest in the young market’s long-term prospects. The company went public in late 2002 with a $45 million offering. PRA now ranks ninth on our list of top debt purchasers.

The top revenue list also begins with Sherman Financial, at $325 million in revenue, nearly tripling the figure reported in 2000.  

Risk Management Alternatives, Duluth, Ga., earns the second spot with revenues of $295 million. RMA acquired Equifax Inc.’s accounts receivable unit in 2000. RMA’s high revenue total in 2002 can be linked to the $2 billion in charged-off debt that Equifax bought in 1999. RMA bought $850 million in 2002, not enough to crack the top 10.

Rounding out the $100 million revenue club are Arrow Financial Services, based in Niles, Ill.; Asset Acceptance; and OSI Portfolio Services, also based in Duluth, Ga. Midland Credit, Cavalry – which grew revenue ten-fold over its 2000 figure – NCO Portfolio, and PRA all checked in with more than $50 million in revenue.

Cavalry also made one of the more dramatic leaps on the purchasing list. Far from the top 10 in 2000 with $573 million in purchases, Cavalry jumped to fourth place based on 2002 numbers, making more than $4.1 billion purchases. The growth was buoyed by taking on $1.4 billion in troubled Conseco assets.

More growth may be coming. Cavalry announced in November that Bear Stearns Merchant Banking acquired a large minority equity stake in the firm. “We’ve expanded our business fairly dramatically, and we now have four centers running. We have more than $8 billion in receivables and 2.5 million accounts,” says Alfred Brothers, senior executive vice president. “It’s kept us pretty busy.”

Too much funding is what often gets buyers in trouble. Buying only what employees and technology can handle may seem like an obvious plan, but not doing. So led to the fall of CFS and Creditrust  

Both led the buying list at one time, but closer looks revealed houses full of smoke and mirrors. Loans often were poorly worked, the chance for good results dwindling as accounts aged. (In 2001, collections agency NCO Group bought Creditrust, reforming it as NCO Portfolio Management.

Other changes in the debt buying ranks include Midland Credit’s revival. Midland acquired the assets of West Financial Capital Group three years ago. After dealing with the reorganization, Midland reemerged at number seven in the volume purchased list – jumping to $2.8 billion in 2002 from $148 million two years earlier.

Notable drops on the buying list include First Select Corp., an arm of Providian Financial Corp., which ranked fourth in 2000 purchases, before closing in 2002, and OSI Portfolio Services, which in 2002 came in at $1 billion behind its 2000 pace of $4 billion. In 2003, debt buying dwindled as its parent, Outsourcing Solutions Inc., pushed through bankruptcy reorganization. OSI announced in December it had emerged from bankruptcy and secured a $90 million credit facility from Merrill Lynch for the purchase of charged-off debt – again positioning itself to be a top buyer.

The industry is dominated by the top-ranked players, along with firms such as Collins Financial Services in Austin, Texas, and Oliphant Financial Corp. in Sarasota, Fla., companies that fell just outside the top 10. Together, the debt-sales market’s leaders seem to have the industry experience to avoid pitfalls that doomed many rivals. That should make sellers comfortable that the market is here to stay.
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