The Booming Debt Consolidation Sector

Amid the ongoing fallout of the Hayne banking royal commission, another area of financial services has been subject to quieter reforms: the thriving market for debt agreement and debt consolidation arrangements.

As anyone who listens to commercial radio would attest, there’s no shortage of providers spruiking their wares as a panacea for indebted consumers – for a hefty fee of course.

Debt agreements are binding contracts to repay an agreed amount to creditors over a certain period, while debt consolidation merges several troublesome debts into the one facility.

According to the listed FSA Group (FSA, $1.04), business is booming.

“Consumer debt levels are at a record high, new inquiries are increasing and demand for our product and services is growing,’’ says the company, better known under its trading name of Fox Symes.

What’s most disturbing is that the demand is in the context of historically low-interest rates – and nor prizes for guessing what happens when rates “normalise”.

FSA is enjoying a purple patch across both its debt management and lending divisions (sub-prime home loans and personal loans, the former being a vehicle for borrowers to consolidate their debts).

As an alternative to bankruptcy, debt agreements have soared in popularity over the last decade, growing at a compound annual growth rate of 7.5 percent since 2004 (14,000 agreements were inked last year).

FSA’s continuing rosy fortunes flies in the face of a series of amendments to bankruptcy laws clamping down on what the government describes as “unscrupulous practices by a small minority of debt agreement administrators.”

Effective from July 27, the Bankruptcy Amendment (Debt Agreement Reform) Bill caps the maximum period for a debt agreement at three or five years – three years for non-homeowners and five years for those who own a home (and presumably are struggling with a monstrous mortgage).

The amendments increase penalties for wrongdoing and expand the power of the Official Receiver in Bankruptcy to reject agreements that would impose “undue hardship” on the debtor.

Also, the minimum bankruptcy period reduced from three years to one year – a move aimed at not discouraging entrepreneurs from having another go and removing the stigma of the condition.

The counter-argument is that it makes it easier for the spivs to get back in business.

In a submission to government, a gaggle of consumer law advocates take a less generous approach: “In our view, there is only a very narrow band of people for whom a debt agreement is a suitable option and even fewer for whom it is their best option.”

FSA argues three years is too short for creditors to achieve an adequate return and they will reject these arrangements. “The likely consequence of this may be an increase in non-homeowners exploring other solutions to manage their unmanageable debt,” the company says.

With a 39 percent share of the debt agreement market, FSA should be ruffled – at least in theory. But as it points out, unlike most of its rivals it offers broader services including informal arrangements, personal insolvency agreements and, of course, bankruptcies.

FSA also alludes to a new product in response to the reforms.

The non-conforming loans offered by FSA are the sort of proposals the banks increasingly reject these days. However, FSA’s book is backed by Westpac, which in November approved an expanded $75m facility to back FSA’s loan growth.

As of June, FSA claimed 21,885 debt agreement clients, up 8 percent, accounting for debt of $398m.

The company also reported a half-year profit of $7.73m, up 40 percent on operating income of $35.8m (up 9 percent). The consumer lending loan pool grew 13 percent, to $428m, en route to a targeted $500m by 2020.

FSA trades on an attractive multiple of ten times and a dividend yield of 5.5 percent. The company may be vulnerable to further reforms launched by a Shorten Labor government, but given the groaning debt profile of the average Australian households, debt agreements look like remaining a growth sector for some time yet.

Credit Intelligence (CI1) 1.4c

Lawyer and Credit Intelligence founder and CEO Jimmie Wong has first-hand experience of what a decent property slump can do for one’s personal wealth: he owned five properties in Hong Kong during the Asian financial crisis when average prices fell 70 percent.

“I lost all my money,” he says. “Many people in Hong Kong were like me because most properties were in negative equity.”

Naturally, droves of property owners filed for personal bankruptcy, many having used personal loans to finance mortgages. Many took their own lives after being pestered by collection agencies.

Wong and his firm started handling bankruptcy cases, but the trouble is Hong Kong bankrupts can lose their homes and often their job. So he entered the business of arranging debt agreements.

Wong says that since then he has acted for 9000 people, for an average fee of $HK12, 000 ($2000) but saving them from a four-year bankruptcy. As it happens HK property recovered strongly – they’re now six times the value of an average Sydney pad – but all too late for the victims of the financial crisis.

The bad news for Australian homeowners is that having built a thriving Honkers business, Wong is now eyeing the two million families in strife over mortgage and consumer debt.

Interest only loans – typically with a three year holiday – pose an especially ominous threat.

“There’s a good chance we will get good market share because when property prices drop by 20 percent’ a lot of problems will emerge.”

As a prelude, Credit Intelligence I last year entered an alliance with the national insolvency firm Cor Cordis, which will adopt the company’s automated case management platform.

Credit Intelligence listed here in May last year.

Legally, Credit Intelligence benefits from Australia and Hong Kong share a similar British-based legal system. Debt agreements, in particular, are similar to the Honkers version.

Wong rues the cost of operating in Australia is too high, so the company plans to replicate its low cost, automated platform means it can service Hong Kong clients at an average cost of $100.

Outside of the Cor Cordis tie up, CI’s Australian plans involve acquiring “one or two” debt management companies or insolvency firms and intends to undertake a capital raising to further these ambitions.

“If we are lazy and don’t expand our profits won’t be able to rise,” he says. “But we will try to continue paying dividends to shareholders if possible.

Weighed down by ASX listing costs, Credit Intelligence reported a 72 percent slump in December half-year earnings, to $276,466. Revenue grew 40 percent to $2.8m and new bankruptcy cases increased 10 percent to 1542.

And, no the company has no debt. After all, it’s the work of the Devil.

Wong accounts for 47 percent of the company, despite offloading 8 percent of his stake to two unrelated investors last September.

About Tim Boreham

Tim Boreham edits The New Criterion. Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.

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