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A hot season for debt collectors

After the strong performance of the sector in 2017, companies are preparing for record volume deals

Overdue debts are a valuable asset that attracts investors and can bring profits. It wasn’t exactly this way seven years ago, when the first debt management and collection companies started their businesses in Bulgaria. The perception of bad debts as something embarrassing, which is better not to discuss in public, changed to a completely natural thing that can make a decent business. In 2017 this business has generated BGN 35 million of net profit for the owners of the companies in the sector, shows the analysis of financial results. This makes their shareholders willing to invest in development. The stable performance of collection companies lets them close larger and more complex deals with bad debt portfolios, and this development will most probably continue over the coming two year at least. Unprecedented strong activity in the coming months is expected and this will lead to a much faster unloading of the mountains of debts, which will relief both creditors and debtors.

Growth continues

The financial data for the 15 largest debt collectors in 2017 shows more than 15% growth in assets, revenue stability and a slight decrease in profits. Profitability remains impressive with a double digit percentage – an average of 14%.

The market is dominated by local subsidiaries of multinational players such as Debt Collection Agency, part of the Norwegian B2Holding, EOS Matrix, owned by the German company with the same name, and Poland-based Kredit Inkasso. They all have access to cheaper financing from their parent companies which turns them into main participants in major auctions for NPL portfolios. Among the middle-ranking companies in the sector we find  Frontex, which relies on institutional investors such as the European Bank for Reconstruction and Development (EBRD and bank-related companies such as OTP Factoring. Behind the top performers of the sector lag companies, owned by local investors that rely on their own resources, which constrains them to bid for large portfolios. Instead, they specialize in debt processing for quick loan companies, telecom providers and utility companies.

This distribution of market positions might mean the market leaders will continue to grow and smaller players will be soon marginalized, experts predict. There are certain indications that this year, Swedish Intrum will step in the Bulgarian market by buying a local company. If this happens the potential for new players on the market will be exhausted and a process of consolidation will begin, experts think.

It’s not all pink and rosy

Despite the overall good performance of the sector, there is one unexpected trend – the shrinking profits in 2017. Representatives of the companies explain this phenomenon with the rising costs for salaries, the higher costs of bidders in the auctions, the increasing legal costs and the investments made to meet the new regulations. Besides this, the business is well-optimized, according to managers in the industry.

A factor that strengthens the pressure on profits is the rise in prices at which portfolios are purchased, says Alexander Grillhees of Frontex. “There is strong competition in the sector, which is reflected in the high prices of portfolios and this logically reduces the profit,” confirmed Rayna Mitkova-Todorova from EOS Matrix. She adds that any debt purchase or lack of such a transaction impact the company’s revenue.

An illustration of the latter are the financial reports themselves: Debt Collection Agency records 18% revenue growth year-on-year after the acquisition of two large portfolios from Unicredit Bulbank last year. EOS acquired a record portfolio of BGN 460 million from UBB at the beginning of this year which will be reflected in the reports next year.

Furthermore, there is one new type of debt on the market and that influences the performance of the companies in the sector – the corporate NPL portfolios. In the early stage of its development the sector used to purchase primarily unsecured consumer loans, while today debt management companies acquire also corporate debts, the collection of which requires an individual approach and additional efforts to find a buyer for the collaterals. The results of this type of deals is usually visible at a later stage, while the expenses are levied in the financial report immediately, experts explain.

Dimitar Bonchev, Business Development Director at DCA, points out another important cost of today’s debt collection companies that put pressure on profits – the investments in digitalization and in the development of new digital channels for customer communication and support.

Nevertheless, the trends are positive. The revenues are stable due to the overall growth of the secondary debt market, to the increasing employment, and last but not least, to the positive attitude of the debtors themselves, Zornitsa Dimitrova from Kredit Inkasso remarks.

Total revenue in the collector business exceeds BGN 140 million in 2017 , with over 81% of this amount coming from the companies that purchase receivables. The revenues are 8% higher than the previous year, says Milena Videnova from Coface Bulgaria. According to her, the future earnings in the sector might be strongly influenced by companies in the corporate segment that apply financial instruments such as insurance claims to reduce the risk of non-payment.

The revenues in the industry will remain stable in the medium term. The forecast is based on already acquired portfolios that provide business for the year to come. The portfolios are predominantly consumer loans.

The major concerns in the industry are related to institutional issues. “Part of the recent changes in the
Civil procedure code made the debt collection process slower and more expensive…I am referring to the changes in the client notification regime,” said Rayna Mitkova-Todorova from EOS Matrix. “One of the difficulties is the inability of the creditor to obtain an up-to-date account of his clients and so the debtor is actually deprived of the opportunity to learn about his current obligation as well as any new possibilities for repayment,” explains Zornitsa Dimitrova from Kredit Inkasso.

Ready for new records

The beginning of 2018 was a pleasant surprise for the debt collection sector and the companies significantly improved their market forecasts. The year started with the biggest ever deal on the Bulgarian NPL market and continues with ongoing procedures for other large bank loan portfolios. Even the most conservative projections are to go beyond the volume of about one billion BGN registered last year. Among the more significant auctions are the EUR 250 million corporate and consumer loan portfolio of Unicredit Bulbank, which is ahead of the bidding stage. Another big package is for EUR 100 million corporate liabilities owned to First Investment Bank (FIB). There are also two completely open ended procedures – the one of Piraeus Bank selling portfolios before the sell of the bank itself, and the one of Postbank, which includes the buildings of Arena cinema chain as the most attractive asset.

The sector also expects another big package from Postbank. The bank is preparing a new big deal and has requested approval from its headquarters for the unloading of BGN 750 million, unofficial sources familiar with the matter say.