debt collection

Good times for debt collectors
Author: Stewart Oldfield.
Date: 08/11/2006
Words: 510
Source: AFR
Publication: The Financial Review
Section: Financial Services
Page: 62


Credit Corp is geared to handle the increase in delinquent debt if interest rates go up today,writes Stewart Oldfield.
Australia's fast-growing debt-collection industry is preparing for a rise in consumer bad debt if the Reserve Bank of Australia increases official interest rates today.

The managing director of the $350 million Credit Corp, Geoff Lucas, said an increase in loss rates on credit card and personal loans could have a big impact on the level of delinquent debt outsourced by banks to the debt-collection industry.

An increase from the present 1.5 per cent loan write-off rates to a still modest 2 per cent would lead to a 30 per cent increase in volumes of bad debts outsourced by the major banks.

Analysts warned, however, that higher interest rates could eventually lead to increased unemployment, which would undermine the value of Credit Corp's debt portfolios.

Mr Lucas expected an increase in official interest rates to trigger a modest increase in write-off rates.

He noted that even if the loan loss rate rose to 2 per cent, it would still be much lower than rates in the United States and Britain.

Analysts estimate that between $300 million and $400 million of delinquent personal debt is outsourced by the major banks, other than Australia and New Zealand Banking Group, each year, giving Credit Corp at least 25 per cent of the market.

Contracting interest margins on credit-card portfolios are encouraging banks to spend less on collection and consider more aggressive outsourcing arrangements.

Australia has three listed debt-collection specialists: Credit Corp, Perth-based Repcol and Brisbane-based Collection House.

Shares in Credit Corp have more than doubled over the past year as it has more than doubled its annual investment in purchased debt portfolios to $93.4 million.

It has forecast material growth in debt portfolio purchases in the medium term but has noted that, historically, growth in ledger volumes has grown rapidly, followed by periods of consolidation.

Wilson HTM analyst Andrew Hills is forecasting net profit in the 2007 financial year of $20 million, up 38 per cent on last year, including $100 million worth of debt acquisition. "The outlook for Credit Corp and the debt-collection industry will continue to improve as the asset quality of unsecured personal lending deteriorates and the banks outsource more of their collection function," he said.

Mr Lucas said that more than 50 per cent of the company's debt-ledger inflows were sourced through multi-year forward flow agreements that offered the company certainty of pricing and deepened Credit Corp's understanding of the bank supplier and its debt.

Banks were outsourcing larger quantities of delinquent debt earlier. "Their strength is in distributing debt, not collecting debt."

Credit Corp's staff productivity had improved with new telephone dialling technology that was introduced late last year.

Mr Lucas also said acquisitions did not make sense "when you have an organisation that is growing at more than 20 per cent per year".

Credit Corp is understood to have not made the short list for the $100 million sale of D&B Australia.