Ask The Experts: The ARM Industry in the Second Half of 2009

Question: How will the economy impact the ARM industry in the second half of ’09?

Answer: (from Mark Russell, director at Kaulkin Ginsberg. Mark explores three key elements of the ARM industry below: consumer financial health, commercial debt, and the government collection market.)

Consumers
Over the past 18 months many consumers have seen their active credit card lines reduced, inactive credit card accounts closed out, and told that they need to meet higher credit standards in order to receive a loan to buy a home or car. They have also witnessed the values of their homes, retirement accounts and 529 Plan balances decline. On top of all of that they have been dealing with increased financial uncertainty due to higher unemployment and underemployment rates, and rising fuel and food prices.

These trends have put many consumers in a financial bind, resulting in a substantial impact on the ARM industry by causing placement levels of delinquent and charged off consumer accounts to rise significantly while simultaneously reducing the liquidation rates on these portfolios due to an inability of many consumers to pay their debts off in full or settle them. However, these same trends have also caused consumers to change their spending habits in 2009, motivating them to save more of their disposable income as an insurance against future financial issues. Many consumers are also trying to reduce their costs by paying their debts on time to avoid costly late fees and onerous interest rates, and making higher payments on their outstanding debts in an effort to reduce/eliminate their balances as quickly as possible.

This is creating an increase in liquidity for some consumers, which could have a positive impact on portfolio liquidation rates in the second half of 2009. However, if economic conditions worsen over the next several months, consumers’ ability/motivation to make debt payments may decrease until they feel more secure about their personal financial situations, which could have a negative impact on liquidation performance.

Prediction: Placement levels of delinquent and charged off consumer accounts will continue to rise, but could potentially flat-line during the second half of 2009, while liquidation rates will remain flat or possibly increase compared to the second half of 2008.

Commercial
During the past 18 months many U.S. companies have also been working diligently to de-leverage their balance sheets in order to survive the recession and create as much financial flexibility as possible to pursue attractive business opportunities. This has caused an increase in delinquent and charged off commercial placements as some companies have become more aggressive in pursuing their outstanding receivables, while others have struggled to make their debt payments.

Like previous recessions the commercial sector has enjoyed a delay in liquidation rate declines compared to the consumer sector, so some commercial agencies and debt buyers experienced an up-tick in financial performance in 2008. However, starting in 2009, some commercial agencies experienced a decline in liquidation rates, a trend which continued into Q2. These liquidation rates may fall further during the second half of 2009 as many small and mid-sized U.S. companies continue to struggle to survive this recession.

Prediction: Placement levels of delinquent and charged off commercial accounts will continue to rise during the second half of 2009, but liquidation rates will decline.

Government
Despite the federal government’s efforts to stimulate the economy via various fiscal and monetary policy programs and financial bailouts, government entities are still struggling to make ends meet. In 2009, many government institutions have been forced to substantially reduce their budgets and find alternative means to generate revenues. This has created a tremendous opportunity for ARM companies, as placement volumes of delinquent municipal, state and even federal accounts have increased. While liquidation rates have declined over the past 18 months, the level of decline has not been as significant as non-government debt accounts.

Prediction: Placement volumes will continue to rise during the second half of 2009, particularly from local and state government entities, many of whom will be outsourcing placements for the first time. This will create a significant growth opportunity for the ARM industry.