The CEO of Debt Collection Agency talks to “Capital”
Martin Despov is CEO of Debt Collection Agency (DCA). He is one of the company’s founders and managers up to its acquisition after the company expansion. From 2016 DCA is part of the international B2Holding whose main seat is in Oslo, Norway. The Bulgarian company is one of the leading companies in debt acquisitions in Bulgaria and Romania. Martin Despov continues to manage DCA as one of its CEOs. He has many years of management experience in the financial sector in collecting and managing receivables. He has held senior managerial positions at a leading international non-banking financial institution. He has graduated in Finance from the University of National and World Economy.
What is your opinion of the proposed 10-year absolute limitation on the debts of natural persons?
– I would say that the proposed bill is contradictory, ill-considered, giving privileges to a small part of society and has the potential to inflict harm on everyone else. We support the good idea that there should be no “eternal” debtors and that it is not fair for consumers with financial difficulties to be burdened with excessive costs in the course of receivables court proceedings. The question is whether, as it is presented, the bill effectively solves the problem of this small part of the society that is unable to serve permanently their debts. This law will drastically violate the balance between the interests of creditors and borrowers. Large credit companies which provide debts or goods and services on postponed payments, as well as those who buy receivables, will suffer major losses but will remain on the market and will adapt by tightening their conditions to lend and increasing the cost of borrowing. In the receivables business, prices of future deals will decrease. This means that banks will get less fresh resource for their portfolios. Deals will not be less desirable, but they will be concluded at a lower price.
How will this impact consumers?
– A significant proportion of the households in the country, which use loans and regularly serve them – 87-88 % will have to face a more difficult and more expensive access to crediting. Each credit will be accompanied by additional guarantees which will make loaning more expensive and will slow it down. This is definitely not fair. What remains is these 12-13 % of households, which, due to one reason or another do not serve their loans. Debt collection process is even at present long and difficult, often taking more than ten years. Under the 10-year absolute limitation and the risk of not returning the borrowed loan, creditors will abruptly accelerate their debt recovery efforts, including those through courts, which will put strong pressure on a large portion (95%) of debtors with outstanding obligations. The possibility of renegotiating and rescheduling their debts will be minimized. Our statistics show that over 75% of citizens with more than one legal debt do not serve their obligations to the state. In practice, this change gives them an extra privilege at the expense of all the right payers and creditors. A privilege is also granted to the so-called credit millionaires who have the resources to delay proceedings long enough. Presented in this way, the bill violates some basic principles of economy and law, one of which is that obligations must be served, which can create prerequisites for economic stagnation with all subsequent negatives. The bill will stimulate the profession of the “eternal” debtor, and with the unavoidable “tightening” and with the more expensive access to crediting, there is a danger that the “illegal debtors” from the gray sector could return to the market. There is a better way to solve the problems of eternal debtors – by way of the Law on Natural Persons Bankruptcy, widely used in the practice of the European countries. Unfortunately, the new bill on this issue as of July 21, 2017 again does not provide a fair protection for creditors. In combination, the two bills would in this way lead to a debt vacation and to unpredictable losses for the financial sector and the economy. It is more reasonable in respect to consumers’ relief that court proceedings costs be reduced, for example.
What are the tendencies of development in the sector of debt collection companies at present?
– Growing purchase volumes, improving the financial performance of the companies in the sector and the introduction of foreign strategic investors are clear signs of dynamic growth and good prospects. In recent years, the companies in the sector have invested hundreds of millions in portfolio purchases, thus supporting the stability of the financial system. Bulgaria is one of the promising countries in this type of business in the region and it is foreseen that volumes will continue to grow. The factors for this are the higher share of non-performing loans as compared to the other EU countries and the wish of the creditors to write off bad receivables faster, urged by the bank regulator as well. We expect that over the next few years the investment in portfolios will reach over EUR 200 million. Unfortunately, if the proposed legislature changes are adopted, investments will drop dramatically, which will also affect the results of the sellers, i.e., of credit institutions.
How has the change in the ownership affected Debt Collection Agency?
– The effect is positive. We have access to a financial resource which is important for our development on the growth market. Besides, international companies come with their own knowledge and understanding of ethical behavior on the market. They bring with them the positive image of the industry that helps us convince banks that we are the right partner. Banks prefer working with international companies that have clear capital and rules. The new owner gave us access to the big market. The growing competition is undoubtedly positive for each player on the market. Creditors get greater liquidity and improve their profitability. Consumers with overdue debts also benefit. We give them much more personal attention and time. We communicate actively with them in finding a way out of the current situation, we negotiate and offer them various options for deferred payment.
You achieved an enormous profitability of the revenue in 2016 – what is this due to and are these the traditional margins in the sector?
– This is due to the large volumes, as well as to the accumulation over the many years up to now. A portfolio cannot be developed for a year or two. Our efficiency is higher. Our expectations are that with the entry of the market into a period of better maturity, profitability will certainly decrease. This has been observed in all growing markets.
How does your owner assess the environment you work in?
– The Balkans region market is a natural step for every major European player. Our company works in over 15 countries. The region is interesting because here sale processes came late. Romania is advancing at a faster pace in respect to reaching the traded volumes in the other European countries. Bulgaria is still lagging behind although over the past two years there was a distinct change in the intentions and the wishes of the banks. Market conditions change, prices change and there are already companies on the market, ready to buy secured portfolios- corporate loans and loans of small and medium-sized enterprises.
Are other international companies expected to join in as new owners and is change of company ownership expected in the sector?
– Even having in mind the growth perspectives, the market is relatively concentrated and it is not big enough to accommodate all major European players. Nevertheless, we expect that other international companies will enter the market in the next few years which is logically to be implemented by acquiring existing companies. We cannot exclude transactions for market consolidation which is quite a natural process. The political instability over the past few years, as well as the ongoing changes in legislature to the detriment of creditors may become an obstacle for strategic investors.
Would you consider buying yet another local player?
– At this stage we are not discussing such a possibility but being aware of the growth objectives of international companies, I cannot exclude us or somebody else after a certain time to consider such a step. Right now, it is more reasonable for us to grown organically. The deal for DCA acquisition is quite new for our holding to think about further expansion.
Your company bought one of the biggest portfolios – BGN 182 million of Unicredit Bulbank. What part of it and for how many months have you collected?
– Secured corporate portfolios have a special character. To collect a debt that a bank has failed to realize for years takes more time. It is too early yet – we cannot expect a result in the coming years. With portfolios of this type, companies are bankrupt and insolvency procedures are slow, such procedures do not depend on the will of creditors. This is one of the reasons why results come much later and slower and are unclear at present. This has also been the first deal of its kind in terms of type of portfolio on the market and can be accepted as a test.
Are banks open to selling portfolios? What portfolios were sold over the last year and what are banks currently offering?
– Banks have definitely started selling portfolios more actively. Not at the tempo and volumes we foresaw and planned for this year, but they are still the main force on the market. We already have significant examples of big portfolio deals. Transactions are already concluded periodically and at an earlier stage, which, respectively, has increased prices. What credit institutions sell are mainly non-secured consumer credits portfolios. DCA is a major player on the market of such portfolios. We have also developed a new market segment – acquisition of portfolios of non-performing secured corporate loans. DCA has concluded with UniCredit Bulbank the biggest deal in this field up to now. Our expectations are for this segment to keep developing most dynamically until the end of this and next year.
How are portfolio sales going now compared to a year ago? At what prices? You mentioned a price increase?
– Banks now offer newer portfolios with the idea to release resources sooner. There is a tendency for increase in the offered for sale secured portfolios, mainly corporate receivables and receivables of small and medium-sized enterprises. We also see increase of transaction prices due to greater competition. The price difference as compared with prices of two or three years ago is significant. There are already deals concluded at 35-40 % of the value of the portfolio. There are portfolios that are sold at a price below 10 %. Everything depends on the collection potential. However, the forthcoming changes in the 10-year limitation law would eventually cool off the market and reduce prices considerably. Consumer credit portfolios, which are increasingly available, have a maturity period of less than two years. Corporate secured receivables have a later maturity since banks have previously tried to collect the receivables. The period is between 3 and 5 years. The volumes remain at last year’s levels.
Do you expect more debt on the market due to pressure on banks to reduce the level of non-performing loans?
– Both BNB and the World Bank and the IMF have clearly signaled that the level of non-performing loans in Bulgaria is still high compared to the EU average. Bank managers in Bulgaria have known this for long and have taken steps to speed up the process of selling their overdue loans. Even if the forecasts for doubled debt volumes to be redeemed this year are not fulfilled, we will surely witness successive growth and a new highest value. We will undoubtedly see at least two more big deals by the end of the year. The main volumes are expected to come from corporate secured loans. With consumer credits, the market has followed a certain cyclic pattern, banks have achieved stability and regularity.
Is it early to talk about a secondary market of bad debts?
– There are single deals on the secondary market but at present they are more of an exception. Several companies have tried to hold such auctions. Prices are extremely low as expected. There are also deals when a company considers they have no time resource to focus on a definite part of their portfolio and prefer instead of neglecting the portfolio – to sell it to another company. There isn’t a developed secondary market for receivables.
Besides banks, who else sells debts and in what volumes?
– The largest volumes are sold by banks. Then, sales of non-banking financial institutions follow. One of the telecoms periodically does sales, but, as compared to the total volume of sales, they are very small. Utility companies very rarely take action, unlike in Romania, for example, where they sell receivables almost on monthly basis.