Even Debt Buyers Can’t Get Credit!!

Banks are pulling credit lines from collectors who need funds to buy bad debt. At the same time, rising unemployment is reducing recoveries. The result has been higher costs and lower revenues. Some of the country’s top debt collection companies, many of which are owned by private equity, are expected to report losses or severely reduced profits.

Worst hit are the debt buyers – companies that purchase bad debts off the banks and then collect them for profit.

1st Credit, one of Britain’s leading debt buyers, which was 60pc acquired by Bridgepoint six years ago in a deal that valued it at £72m, is just one debt buyer in the process of revising its business model. Almost exclusively a debt buyer now, it plans to generate a quarter of its income from lower-margin debt servicing within two or three years.

It also plans to source half its funding from mezzanine debt providers in a profit share arrangement – a far higher cost of funding that in the past. In 2007 it made £27m profit before interest and tax.

1st Credit is not alone. Bankers say the profits in the £800m industry will fall and cause widespread consolidation led by the industry leaders – Aktiv Capital, 1st Credit, Cabot Financial and Lowell Group.

The industry buys about £8bn of bad debt from the banks every year, at about 10p in the pound. It typically expects to recover twice that over seven years. However, about two thirds of borrowers can not be traced and another 10pc will refuse or can not pay. The remaining 25pc account for all recoveries.

“Following the credit crunch, portfolios are not delivering at that level,” said Najib Nathoo, chief executive of 1st Credit.

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