Collection Industry Analysts Slightly Bearish on Second Half Economy

The first half of 2008 marked the continuation of the credit crunch, increasing delinquencies and chargeoffs and a weakening economy. How does the second half of the year look? InsideARM spoke with several industry executives to get their take on the economy and the receivables business. This is the last of a series of articles looking at the next six months.

“All the predictions are that the economy will slow down and suffer more in the second half of the year,” said Dimitri Machaud, Kaulkin Ginsberg consumer finance analyst. “The outlook for 2009 is a little more fuzzy. Any recovery will take a lot of time.”

With the economy at this stage, the accounts receivable management industry is enjoying increased placements, but struggling with lower recovery rates, Michaud said, echoing the views of collection industry technology providers ("Collection Tech Vendors See Slow Down Continuing," July 3), ("Is it Recession Yet? … Umm, You’re Kidding, Right?," July 3).

To compete effectively in this environment, Michaud recommended that collection firms must retain their best employees while implementing technologies that make those employees more efficient.

Michaud also sees lenders more closely scrutinizing credit scores and financial backgrounds of potential borrowers rather than providing quick, automatic approvals.

On the mergers and acquisitions side of the accounts receivable management business, deals were still getting done at good multiples during the first half of the year despite some of the credit issues facing the economy at large, said Mark Russell, director at Kaulkin Ginsberg.

“The number of deals has declined, but the amount of the deal values has gone up,” Russell said. “Debt purchasing companies in Europe are getting higher acquisition multiples than U.S. companies. Private equity in Europe remains bullish about recapitalizing companies.”

In the second half of the year, Russell expects the state of the economy to lead to more add-on acquisition activity and less platform acquisition activity.

One factor that could lead to lower merger and acquisition activity in the second half of the year is a rising unemployment rate, Russell cautioned. “If it goes significantly higher, then we’re going to have some concerns regarding liquidation results. [Significantly higher] unemployment could have significant [negative] impact on mergers and acquisitions, like we saw after the Internet bust in 2001-2002.”