Business Week reports that amid a general collapse in the mergers and acquisitions (M&A) field, one area that is still booming is in acquisitions of companies that buy and collect on defaulted consumer debt. Acquisitions of $1.8 billion this year already exceed last years total of $1.65 billion.
The apparent lure of the hot money M&A crowd is that with a collapsing economy, there is an ocean of debt that is defaulting giving the debt collectors an opportunity to cash in on chasing delinquent customers. Every company in the country from small businesses to the S&P 500 list are finding out to their surprise that when you extend credit to already heavily leveraged and/or poor credit risks, it doesn’t take much before your customer is unable to pay.
My forecast is that the buyers of debt collection firms that the hot money deal makers are selling will not be sailing on their yachts next summer.
Borrowers of all credit levels suddenly have a new mentality:
-there is no job security and layoffs in the thousands are announced daily; even if I have the money, it is better to keep it in my pocket than to pay off overdue bills. The choice between being able to buy groceries or pay off a delinquent bill is an easy one.
-the massive bailout of of the banking industry has caused much resentment among working people who justifiably perceive this to be a handout to those who caused the problem to begin with and in addition, made multi millions of dollars in the process.
-the idea that debts really don’t have to be paid back is being encouraged by the government’s bailout mania, especially with the institution of mortgage modifications for delinquent borrowers. If I don’t have to pay my mortgage back, I am certainly not going to worry much about defaulted credit card debt. The repudiation of debts is being encouraged by the very actions that the government is taking to contain the economic crisis.
-lending to many consumers, especially the weaker credits, has been drastically curtailed. If I won’t be able to get new credit, why would I worry about the credit implications of not paying off old debts?
-I know many people who are not using bank accounts anymore, but cashing their paychecks and paying their bills in cash to forestall the seizure of their money by creditors who have judgments against them.
-the change of power in Washington along with the current job losses and declining economy will lead to a revision of the bankruptcy laws, essentially reversing the changes made in the recent past which made it much harder to file a Chapter 7 liquidation bankruptcy. The debt collectors who think they can obtain a judgement and wage garnishment may soon find that their claims are now worthless.
-the most obvious reason that debts will not be collected easily or at all is the fact that the American consumer simply does not have the money; squeeze as hard as you want to – there is nothing left so nothing will be paid. As reported in The Wall Street Journal,
“This should be the best of times for America’s debt collectors, since never has a society been so in hock. But ironically, much of the debt-collection industry is struggling because there’s little cash left to squeeze from strapped consumers.
Encore Capital Group Inc., a San Diego debt buyer, said third-quarter profit fell 30% to $3.8 million after its impairment provision for debt — an accounting term for debt it doesn’t think it can collect — rose to $7.3 million from $2.4 million. And Debt Resolve Inc. of White Plains, N.Y., said big losses at its debt-collection unit led to a second-quarter loss of $4.2 million.
“More and more accounts are going out to debt collectors, but it’s harder than ever to collect,” said John Nemo, a spokesman for ACA International, a Minneapolis-based trade group that includes 3,500 of the country’s estimated 4,500 collection agencies.
“There may be no other industry that has such immediate knowledge of consumer liquidity,” said Paul Legrady of Kaulkin Ginsberg Co., a Rockville, Md., consulting firm that advises collectors and others who manage accounts-receivable. The company publishes the Kaulkin Ginsberg Index of indicators such as corporate charge-offs of unpaid debt. “There’s been a clear downward trend for the past year,” Mr. Legrady said.
The slump also hurts businesses that supply equipment and services to debt collectors. Soundbite Communications Inc., a Bedford, Mass., company that makes automated robo-callers for debt collectors, told investors recently that it expects sales to agencies to decline in the second half of this year.
“Their ability to actually collect payment is significantly reduced because more and more debtors are simply unable to pay,” said Soundbite’s chief executive, Peter Shields. he said. As a result, debt-collection agencies are “becoming more selective in their spending.”
Good luck to the new owners of the debt collection agencies – I would say that the other side of this trade got the better deal.