Think Differently: How to Prepare for Debt Sales

Bob Deter, VP of Business Development at Crown Asset Management, has been in the industry for a long time. Check out our Think Differently interview with him, where he discusses how best to find a partner for debt sale, plus:

• The optimal time to sell accounts
  
• What makes a debt buyer stand out in a crowd
  
• How to calculate the value of your portfolio

Watch Erin's interview with Bob here, or read it below.

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Erin:

Hi everyone. And thank you so much for joining today's edition of Think Differently. I'm Erin Kerr. I am the Director of Content for iA Strategy and Tech, as well as the Executive Director of the Innovation Council. Think Differently is a feature of the Innovation Council. And today I'm here with Bob Deter from Crown Asset Management. Bob, thank you so much for being here today.

Bob:

Yeah, thanks for having me here. And I appreciate the time to chat with you and share some information.

Erin:

Yeah, absolutely. I'm really excited because this is not an area I know a ton about. But why don't we start with you telling us a little bit about yourself?

Bob:

Absolutely. I have been around the industry for 33 plus years. Always in some sort of a collection recovery focus. I started my career at Discover Card. I ultimately spent 17 years there, beginning in collections and ending my time there managing and running their debt sales. From there, I moved over to the purchasing side of the industry and that was about 16 years ago. After that, I spent several years managing regulatory compliance and most recently I have gotten back into the space that I really enjoy and that's the debt purchasing and sales space. And I currently serve as the Vice President of Business Development for Crown Asset Management. You'll probably hear me refer to ourselves as CAM later on.

Erin:

Great. And I am going to take the opportunity to also refer to you guys as CAM  going forward in the interview. It sounds like you've been around a while. You have great experience from both the issuer side and the buyer side, and it sounds like you really love what you're doing. So can you tell me why you love it so much?

Bob:

Yeah, I do. I've always enjoyed the relationship building that comes with the purchase and sale type of transactions, but, you know, and in particular, when you can work for a company like CAM where we've got good leadership and look, I'm not saying this is exclusive to CAM, right, but in the industry, but in particular, I'm really happy to be in a position where we've got a leadership team that is focused on building long-term partnerships, providing, exceptional ease of doing business with our clients and all of our partners and you know, where we have a really talented people. I've been around for a while. There's a lot of talent in the industry and I'm just thrilled to be back in a position where I can meet with those folks and network with those folks.

Erin: 

Yeah. And that's great. With all these experiences that you have, if you were talking to someone who was thinking about maybe selling, you know, someone on the seller's side, what would you tell them to look for in a partner there?

Bob:

Yeah. You know, I think it's important to look for a partner that does provide you an ease of doing business. Somebody that's going to protect your brand as well, you want somebody that's got a team with a wide variety of experience. So, our team is an example. We've got experience in everything from investment banking and advisory roles to commercial and capital markets, mergers and acquisitions, and experience selling accounts. We've got part of our team that has been in the executive seats of collection agencies and all of that combines to allow us to understand the entire business from a very unique perspective. So you definitely want to look for a partner that's got a well-rounded background.

Erin:

Right. And that makes a lot of sense. But going back to one of the first things you said there, what do you mean by ease of doing business and brand protection?

Bob:

Yeah. That’s a great question. So you want somebody who's got a team that is going to not just work to meet service level expectations, but also to minimize the efforts that you, as their partner, have to put into everything from the transaction itself to post-sale support. You know, I mean, having contracts in place to govern the transaction is a must. But you want a team that's going to actively look for ways to improve the experience, to make life easy for you. It may just be some simple automation that they can provide you, it could be taking on a few analytics tasks. But you want to find somebody that's got experience and a relationship that's going to benefit both of you, no matter how easy it is to conduct a transit action, if your brand isn't protected, it doesn't mean a lot, right? So find somebody that's got, you know, an operational team and a compliance team that will work together to develop service level expectations of their, you know, their servicing partners. And it's going to be able to, you know, audit and oversee those expectations, not just from the operational standpoint, but also from the compliance standpoint. Right? So that you can ensure that the customers that are being served are being treated with dignity and fairness.

Erin:

Thanks for explaining all that. And that might be obvious to some of our audience, but it wasn't super obvious to me. So I appreciate you going through that. You must see many different collection and recovery strategies being implemented by issuers before they sell their accounts. What do you think is the most effective strategy?

Bob: 

Yeah. You know, often when you hear that question, people shift their mind to things like, should I sell my accounts at the point of charge off, or place them with agencies first? How long should I leave them with agencies? Should I scrub the accounts or let my partner do that? You know, all of those things are really important considerations, but I think the best answer to the question is very simply: flexibility. A collection and recovery strategy that has flexibility is really the best strategy.

Erin: 

So can you tell me a little bit more about, in your mind, what that flexibility looks like?

Bob:

Of course, you know, flexibility is really what enables you to be nimble, to react to any given environment at any given time. What's best today is not necessarily going to be best in six months. You're going to want to be conscientious about the structure that you build and the limitations that it has. Now, let me give you an example. If you have a pure agency placement strategy and you're suddenly hit with an increase in delinquencies, can your current agencies absorb that volume effectively and give the accounts proper treatment, right? What's your backup plan to effectively manage those accounts in a timely manner? Boarding an agency is a very long process in today's world, and that's where incorporating that sales into your strategy can really add critical flexibility. And the example that I mentioned, having a purchasing partner that can absorb a large volume of accounts, really, provides you not only instant cash, but an outlet that ensures the timely treatment that the consumers deserve.

Erin:

Okay. Earlier you mentioned providing partners with a total liquidation strategy. What do you mean by that?

Bob:

Yeah, so what I'm really referring to is an end of the collection efforts, right. You think about, at what point do you, as an issuer, want to stop spending your time on collections and spend your time elsewhere? Or do you want your employees to keep working accounts for an extended period of time? Or would you rather say, hey, you know, we're at a point where we'd rather shift those resources into preventing our write-offs or managing the growth of performing portfolios, you know, whatever that point in time happens to be, and that sale is a great tool to get that final liquidation and refocus your time and efforts and expenses.

Erin:

So what's the optimal point in time for an issuer to sell accounts?

Bob:

Yeah, that really depends on the issuer's appetite for managing in-house collection agents, as well as collection vendors. It also depends on their larger corporate objectives. So in my opinion, and I know this isn't super specific, but it's somewhere between the point of charge off and a third agency recall that would put the accounts typically say between zero and 18 months post charge off.

Erin:

Okay. And why is that the optimal point in time?

Bob:

It's really a combination of price sensitivity and corporate objectives. You know, the older that an account gets, the less valuable it becomes. And once it gets close to the statute of limitations, there's minimal value. If you're a huge organization and you have the resources to spend the time and the expenses to put out associated with internal collections or vendor management, you may want to hold those accounts through several agency cycles, but if you're more cash sensitive or your corporate objective is to grow the portfolio, the profitable portfolio, then you're probably better off to get the cash from a sale at the point of charge off and reinvest that into the core business.

Erin:

So this is probably a really good time to ask the question that I've sort of always wondered, which is how does a seller know what their accounts are worth? Do they just say, hey, at the end of my current agency cycle, I've collected X amount of dollars. So I expect the buyer to pay X, like, how does that work?

Bob:

Yeah. It's not quite that simple, right? So you have to remember to back out  expenses, you know, after all those are things that the buyer is going to have to incur. And remember you want to build a long-term partnership. One that you can both rely on the buyer has to be able to make a reasonable return on their investment, right? They're not going to be around in the future to continue purchasing your accounts if they can't make a profit. So, you know, if you collect internally, you're going to want to consider things like the cost of scrubbing your accounts, both the labor and the hard costs, like the cost of sending letters. So your phone system and things of that nature, those are all expenses that are really going to go away, or at least be drastically reduced when you sell your accounts.

Also, some additional cash that you're going to put in, you know, than what you would have spent on those items, you're going to be able to put that to work for you, investing in your core business. And a very important piece is applying a net present value, a reasonable net present value. That's really where your partner gets their room for profit. You know, again, you can invest that cash. Think of it as, you know, a compounding effect that cash has when you get that invested over time, it's just going to return multiples of what you get at the actual time of sale. It's relatively simple math. You just have to include all parts of the equation.

Erin:

Okay. So, as a seller, once you've made your decision on when to sell what happens next?

Bob:

Next, you really need to find the right partner. You're going to want someone like CAM  that's been around the block. Somebody that's demonstrated the wherewithal would stand sudden and unexpected market changes. It would take the recession of 2009-2010. For example, it came on fast and it hit people hard. So if you have a partner that can withstand that, that's a good sign. You want to find a partner, also,that's developed long-term relationships. If they have long-term relationships, it's a really good indicator, their willingness to be a true partner, someone that understands how to help you out when you need help. Sometimes there are bumps in the road, right? And you're going to want somebody that can work with you that has brought industry knowledge to help you get through that and make the transaction successful.

Erin:

Is there anything else that makes a purchasing partner different or maybe stand out in the crowd?

Bob:

Yeah. You know, absolutely. As you look for a partner, remember that both the seller and the buyer are going to want to go through a diligence process. So you're going to want a partner that, you know, welcomes you to ask questions, frankly, that welcomes you to visit their office and put them through a rigorous review, a partner that's going to work with you again to ensure that that transaction is successful for both of you

Erin:

And, how can a purchasing partner help ensure that the seller is successful?

Bob:

That's a really important point. You know, you're going to want the partner that looks out for you, not just for themselves. I kind of touched on this a little bit ago, but, you know, for example, during the diligence process, expect questions about your partner. You want a partner that's going to not just take everything as is and run with it, even if they don't understand it. They're going to ask you some questions about data points. Can they have additional data points? It's important for the sellers to provide that information. So the buyer can thoroughly understand the portfolio and work it compliantly after all that leads back to brand protection, right? If they're not compliant it's not going to add very much protection for you. I can't tell you how many times we would ask for even documents and the seller would say, hey, I'll check on that. And nobody's asked that before.. And that more often happens with new sellers, but they're usually glad that we brought it to their attention and explained the value and importance that it has. Maybe just another quick example, you should expect edits on your purchase and sale agreement. We have had before, you know, we would ask for something and the seller would literally look at that and go, hey, that's a great idea. You know, that actually adds protection for us as well. So you want that kind of a partner. If they're not asking questions, then I'd be a little cautious.

Erin:

Yeah. Definitely makes a lot of sense. So, given all of that and everything you've shared, what do you make of what has been described as a kind of crazy collections and recovery environment over the last 18 months? I mean, it's been a crazy environment generally, but specifically in collections and recovery.

Bob:

Yeah. It has been crazy. I would just say, this too shall pass. It's certainly not what most of us expected at the onset of the pandemic. But, it's going to normalize at some point, you know, without the benefit of the crystal ball, but yet based on a lot of conversation I've had in the industry, I would think somewhere in the second and third quarter of 2022, we're going to see some sort of at least a beginning of normalization in the general marketplace.

Erin:

Okay. Well, that's comforting, I guess. So thank you so much, Bob. We covered a lot today and I'd like to ask you for one last thought for those that may have not already incorporated debt sales into their collection and recovery strategy, can you give us a quick, just, you know, high level summary of the benefits of a debt of debt sales?

Bob:

In short, that sales provide diversification and flexibility that I mentioned early on, you know, they really allow you to reduce your ongoing capital expenditures that are associated with the FTE and debt collections, vendor management, a sale will allow you to immediately liquidate the high expense and low returning portfolios. You're going to immediately get the long term value of the non-performing loans. And, you know, perhaps most importantly, you can take your time and expenses at your time and money and shift those to resources that are more strategic to your operation, you know, reinvest those proceeds into a growing portfolio that returns a really nice profit.

Erin:

Well, I think that sums it up really well. And that's a great piece of advice for anyone in our audience who's thinking about incorporating debt sale into their strategy. So I really appreciate you sharing that with me as well as everything else that we talked about today. So, thanks again, Bob, for being here with me today for this edition of Think Differently. Again, this is, um, part of the iA Innovation Council.

iA Innovation Council is a collaborative working group of product, tech, strategy, and operations thought leaders at the forefront of analytics, communications, payments, and compliance technology. Group members meet in person (and lately, virtually) several times each year to engage in substantive dialogue and whiteboard sessions with the creative thinkers behind the latest innovations for the industry, the regulators who audit and establish guardrails for new technology, and educators, entrepreneurs and innovators from outside the industry who inspire different thinking. 

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