Credit Management October 2018

OPINION
URGE TO
MERGE
The debt collection sector
is revving up for growing
deal activity.
AUTHOR – Lawrie Holmes
INCREASING consolidation in UK debt collection in
the mid-tier of the financial services sector seems
almost inevitable. Two key events earlier this year
seemed to reflect the urgency for M&A activity in
the space.
In May, US-based debt purchaser Encore
Capital Group acquired the outstanding assets of British
debt collection specialist Cabot Credit Management it
didn’t already own. At around the same time, CYBG (the
listed former Clydesdale & Yorkshire Banking Group that
was owned by NAB Bank) swooped on Virgin Money, which
cherry-picked the ‘good assets’ of Northern Rock at the
height of the financial crisis.
Although they represent very different businesses, the
broader theme is of the need to push for scale in a market
where consolidation is already on the cards.
RAISING THE BAR
When Encore bought out all Cabot’s shareholders in May,
adding to the 43 percent share of the group it hoovered up
in 2013, it said its decision to acquire the remaining interest
‘reflected Cabot’s strong performance’. Cabot deployed
£321.5 million in new portfolio purchases in 2017. In the
three months to March 2018, EBITDA was £79.6 million, up
18 percent on the same period last year, when it posted £67.4
million.
Ken Stannard, chief executive of Cabot, said at the time
of the deal: “Becoming part of a large listed entity will
provide access to the capital we need to continue growing
the business in a rapidly consolidating sector.” It’s a far cry
from the end of last year when Cabot was forced to pull its
planned London stock market flotation, blaming adverse
‘market conditions’.
Last March Cabot’s main UK rival Arrow Global made
two purchases in Italy, expanding its presence in Europe’s
biggest market for non-performing loans. On the back of
a 60 percent jump in profits at Arrow last year, the listed
group says the opportunity in the Italian market, with £300
billion of bad bank debt is ‘considerable’.
Given the pressures on banks in the UK and continental
Europe to offload their non-performing loan books, there
ought to be plenty of scope for the debt collection groups
to make hay. But Arrow Global’s shares were trading at
just under 500p when they peaked last year. The reason is
thought to be an assault by hedge funds, sceptical about how
the sector would fare in a prolonged consumer slowdown,
short-selling the stock.
The Recognised Standard / www.cicm.com / October 2018 / PAGE 20