Forum Archive Index - August 2000

["daniel" <DANIEL.ST@xtra.co.nz>]

WEAKNESSES

Paradigm Shift needed in the Australian marketplace – While CCP has been successful in acquiring ten debt ledgers (in eight years), the market for debt ledger sales remains immature in comparison to offshore. In fact, in the U.S.A. there is an active secondary market where large debt ledgers are split up and the constituent segments on-sold to sector specialists. While the move by Westpac to sell its first significant bank debt ledger – and CBA buying in to Alliance – may be a sign of things to come, there is still a mind-shift required before the marketplace is considered vibrant.

Limit of Capital Structure – While CCP’s capital structure is probably better than most participants within the industry, its limited (pro-forma) liquid resources of only about $1 million limits its ability to buy debt ledgers should more become available. This is due to 42% ($2.3 million) of funds raised being used to repay outstanding loans ($1.3 million to an existing related-party shareholder, $0.3 million to the Managing Director and $0.7 million to NAB). However, we view the repayments as warranted, given that the loans were only recently provided and were used to buy debt ledgers. Of the remainder of the funds being raised, a further $2 million is to be used for a deferred purchase to pay for the $40 million-plus (face value) Westpac debt ledger.

Staffing - There is also a potential difficulty in finding suitably qualified staff for expansion of the business. Management is aware of the potential labour shortage, and has developed a comprehensive in-house training program.


OPPORTUNITIES

Increased extraction rates – Management’s expansion plans include up to 15 more staff (full-time collectors and legal support), a Chief Operating Officer and more emphasis on performance bonuses, all of which bode well for increased returns from the recent debt ledgers purchased. Further, the face value of $126 million in outstanding loans does not include accrued interest, which if collected could add substantially to returns.

Independence / Favouritism – CBA’s move on Alliance could mean that any more bank debt ledgers to be sold, will not be offered to Alliance, but rather someone independent such as CCP. Many banks remain sensitive about their client base – even if delinquent – and this could work in CCP’s favour given its long-term track record.

Likely Target – Given its expansionary plans, management is probably loath to hear this, but given CCP’s low market capitalisation, the current rationalisation evidenced by RMG and CBA’s move to take a shareholding in Alliance, CCP could find itself a target, particularly if it proves up its systems with the latest two debt ledgers (Citibank and Westpac).

Leverage its debt collecting skills – Given CCP’s proven debt collection skills and increased infrastructure investment, the Company could leverage off its established infrastructure by providing more third-party mercantile agency services.

Growth via Acquisition – Being a listed entity, CCP could become a predator, within the highly fragmented receivables/collection management market in Australia. While some rationalisation has already taken place, with some 600 mercantile agencies and six debt ledger purchasing organisations vying for a revenue pool estimated at A$250 million a year – and likely to exceed $500 million a year by 2005 – there remains considerable scope.

Organic Leverage from predicted industry growth – The debt purchasing industry is predicted to show rapid growth in the next few years, with telecommunication and utility companies, as well as major banks, finance and insurance companies experiencing deteriorating debt ledgers. This could take the Australian financial services industry closer to the US model, which has a highly developed secondary market in debt ledgers.

Moreover, while the mercantile agency role will continue to operate, there is a clear opportunity in offering Australian credit providers the ability to focus on their core activities by selling their under-performing debt ledgers. CCP's recent acquisition of the Westpac debt ledger is proof that domestic institutions are beginning to see the value of taking under-performing ‘bank’ loans off their books.

Economic Cycle & Industry Dynamics – The receivables management and debt purchasing market is expected to grow strongly in Australia over the next five years, assisted by the credit cycle, which seems to be at a cyclical peak, potentially implying increased bad debts (see charts below on this page). In particular, the level of indebtedness of the Australian community, particularly in relation to credit cards and personal / margin loans could be a boon for CCP in the likelihood of any economic slowdown; particularly as, in turn, there is likely to be an increase in the total number and face value of debt ledgers becoming available for sale.