23/05/2006 - 22:00

Squaring the ledger on debt

23/05/2006 - 22:00

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The mercantile industry in Western Australia has emerged from a period of rationalisation and consolidation, and insiders predict there’s more to come.

The mercantile industry in Western Australia has emerged from a period of rationalisation and consolidation, and insiders predict there’s more to come.

The industry can be broadly separated into three categories: debt collection, where companies collect debt directly on behalf of other institutions; debt purchase, where debt collection companies buy debt ledgers from institutions to recover additional debt; and credit reporting services.     

The distinction between debt collection and debt purchase is important, and debt purchase strategies employed by some firms have been a major issue for the industry.

Repcol, established by Peter Di Prinzio in 1973, is a mainstay of the WA mercantile sector and the Subiaco-based business has grown to be a significant player, listing on the ASX in 2002.  

Repcol, Baycorp and the Queensland-based Collection House, among others, have placed a focus on buying debt ledgers from companies that have already extracted an amount of debt internally.

Debt ledgers usually come at a discount to face value because of uncertainty over how much further debt can be collected, but debt collection companies take them on in the belief they can glean enough debt to turn a profit.

Typically, the value of these ledgers is written down to accurately reflect their value, but new accounting standards have complicated this task.

For example, Repcol recently reported an 80 per cent rise in profit against a 3 per cent drop in revenue for the first half of 2005-06.

Much of the upheaval in the state’s debt collection sector can be linked to the now-defunct Melbourne-based Receivables Management Group, which in 2000 embarked on an acquisition feast, buying 23 credit management firms nation-wide to create a debt collection behemoth.

The acquisition strategy included four Perth companies, including prominent local players Pioneer Credit Management Services, and Laurens and Munns.    

Pioneer managing director Keith John said his group was attracted to RMG because it proposed a decentralised model based on ‘centres of excellence’.

“We believed we could add to that, but the business operated on a centralised call centre structure, not a decentralised model, and didn’t understand the WA market,” Mr John told WA Business News.

Mr John took advantage of the fact that RMG hadn’t registered the Pioneer business name and re-established Pioneer as a new business in 2003. It now has 110 staff, including 50 in its overseas operation in Malaysia.

“We currently have revenues of about $5 million, and will be looking to double that in 2006-07,” he said.

Pioneer is active in the health care and finance sectors, among others, and collects up to $100 million in debt each year.

The RMG episode went hand-in-hand with a period of movement of senior executives within the industry.

Colin Phillis was state manager of global collections giant D&B (formerly Dun & Bradstreet) from 1999 until 2002, before joining RMG. He left RMG in April last year to manage Austral Mercantile Collections’ burgeoning WA local government collections division.

Stella Napier joined RMG from Laurens and Munns in 2000 and left in late 2001 to set up the WA office of Adelaide-headquartered National Credit Management Ltd. Its WA accounts include Bunnings and Western Power.

Austral started operations in Sydney in 1998, and two years later  expanded into Perth, which now accounts for about 25 per cent of the group’s national business.

“The business was recently acquired by QBE, and we are optimistic about the synergies offered by QBE’s trade credit division,” state manager Trevor Greenhill said.

Austral collects an estimated $100 million in WA each year, with accounts worth up to $10 million.

D&B’s Australian business underwent a management buy-out in August 2001, and is today 22.5 per cent owned by Australian management and 77.5 per cent owned by AMP Capital Investors. D&B Corporation retains a 2.5 per cent stake for the naming rights of the Australian business.

Aside from debt recovery, where BankWest is one of its major Perth accounts, D&B is also active in credit reporting, and its major competitor in WA is the Australian Stock Exchange-listed Baycorp, which offers demographic statistics, credit scorecards and a credit bureau.

Baycorp recently sold its debt collection business to investment group Allco Equity Partners, ensuring increased competition with D&B locally in the credit reporting space.

Baycorp state manager Kevin Allen said the credit bureau was its most profitable area of business and that credit reporting would be a focus in the future.

Alinta is currently one of Baycorp’s main collection customers.

There are a growing number of small operators in the local industry, and with the need for scale to achieve critical mass, further rationalisation is likely.

“In the debt collection area there are low barriers to entry, in terms of the financial costs, so there is no limit to the number of people wanting to try their hand,” Mr John said.

RMG’s Stella Napier agreed and said that with the handful of big players and many one-man-bands in WA there was sure to be more consolidation.

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