Read the following article
“Credit receivables stocks Credit Corp Group and Collection House show it pays to look beyond market noise and focus on value. Both have soared this year and further medium-term gains look possible, especially for Collection House, which is still playing catch-up. The debt collectors could have been overlooked. The supply of distressed debt was expected to fall as consumers borrowed less after the global financial crisis or paid down existing debt faster. More competition to buy that debt would lift its price and dampen the profitability of listed debt collectors. If that were true, somebody forgot to tell the market. Credit Corp Group, a star small-cap stock, has raced from a 52-week low of $5.45 to $8.93. Collection House has rocketed from $1 to $1.60 this year after impressing with a solid first-half result and lifting its earning guidance. Improving recovery rates on distressed debt are a tailwind for credit receivables stocks and a reason they can go higher this year or next. Better consumer confidence will encourage people to repay overdue debts and the financially sound eventually will be inclined to borrow again. The industry may be in a sweet spot. Business forecaster IBISWorld thinks so. It forecasts Australia’s debt-collection industry will grow at 6.5 per cent a year between 2013 and 2018, after yearly growth of 3.4 per cent between 2008-2013. IBISWorld says reduced consumer reliance on credit and fewer bankruptcies in coming years will lower the volume and value of distressed debt for credit receivables companies to buy. “Although there hasn’t been a large increase in the overall supply of distressed debt recently, companies are seeing better recovery rates of debt as more risk-averse consumers are paying down debt rather than incurring new debt and less lending to fringe customers is positive news for the industry.”
Source: Featherstone, T 2013, “Credit Recovery Stocks Posied to Collect, Business Review Weekly, February.
Locate the most recent annual reports of Collection House and Credit Corp Group, and other resources available, to answer the following:
- The debt collection industry has two main business models: debt collection with and without recourse. Explain the difference in the business models.
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