Déjà vu, anyone?

It is often said the collections and recoveries industry is cyclical, and those who have been in it for a while may recall the period following 2008’s ‘Credit Crunch’ – I haven’t heard that phrase in a while – and have noticed some parallels with what we are seeing today.

What I recall from that period was something of a debt sale and purchase explosion, with all sorts of lenders moving lock, stock and barrel to a sale model, seemingly overnight, and shuttering their contingent operations as a result.

Accounts were pulled from DCAs with little or no thought to the end customers, many of whom had been making consistent repayments. Pricing was at an all-time high (and to some observers at least, clearly unsustainable) as increased entrants came into the market, each competing for ever larger portfolios.

It was like a modern-day market hysteria on the buy-side (think Tulip Mania in 17th century Holland), combined with a gold-rush on the sell-side.

I recall the CEO of one of the largest debt buyers, upon learning I worked at a contingent DCA, telling me to ‘look for a new job’ as the contingent market?‘would be dead in six months’ and for a brief period it looked as though he might be right.

Spoiler alert: he wasn’t.

Soon after, the economy experienced a shock, and the Purchase community suffered their own aftershock. Their funding, which up until now had been so prevalent, quickly dried up.

The VCs and PEs packed up their cash and moved to other sectors in search of high returns, and financial services were tarnished. We saw ERC measurements and KPIs move from 12 months (yes, really) to 60 months, then ont0 90 months, before settling at 120 months, in an attempt to paint a rosier picture.

Settlements, which had long been in the armoury of debt purchasers, evaporated. Customers (in the main) no longer had the ability to make large, one off payments and the incoming regulator was making it clear it didn’t like blanket settlement campaigns.

All of a sudden, we went from a Sellers’ Market to no market (we sailed straight past a Buyers’ Market), as no one was buying. Pricing, of course, crashed.

Over time, the market stabilised, and a new regulatory regime appeared in the guise of the FCA.

This in turn brought back a sense of confidence. VC and PE cash began to return, and the debt sale market began to show green shoots of recovery.

Quickly the scale players welcomed new funding mechanisms: bonds were introduced, quarterly investment calls were established, securitisations followed, and the leverage increased. Pricing had completely bounced back to the good ol’ days.

However, this time the investors understood more. Questions started to be asked about those pesky leverage ratios.

Suddenly, 4.5x didn’t look big or clever, it looked more like a ticking time-bomb. Almost all scale players announced a programme to deleverage: 3x seemed to be the magic number. Co-investment, or asset management (capital-light) models seemed to be the way to get there.

So, what does all this mean in today’s market, and what are the parallels from that period in the late Noughties?

In recent times, we have seen prices rise substantially – in the case of some portfolios, to unsustainable levels – ?and we are seeing an ever-increasing number of sellers appear.

We are also seeing lenders begin to move to a pure-sale model (to capitalise on high pricing) but we are seeing this against a backdrop of many buyers trying to reduce their leverage (either through buying less, or buying with someone else’s money).

The Credit Crunch has been replaced with a cost of living crisis, which in my humble opinion is affecting a much larger chunk of the general population than the CC ever did. At some point this will surely have an impact on collectability and therefore become yet another ‘Headwind’ to pricing.

The market frenzy continues on the sell side, but with fewer buyers in the market, this could result in one outcome: pricing will crash. There will simply be too many portfolios, at too high a price, for too few purchasers.

From a Qualco perspective, we offer integrated tools and services across both contingent operations and debt sale, as a result when the market gravitates in one direction or the other, we are still able to assist our Clients with a range of complementary solutions – there is no need to adopt an all-or-nothing approach to either side.

I would caution Lenders to ensure they retain a contingent capability in this current market. Don’t sever all ties with the contingent servicers – you might just need them again, and possibly sooner than you think.

The optimum model would involve both contingency and sale, working hand in glove and flexing the balance depending on market conditions. Indeed, we are seeing this approach work successfully with several Clients today.