Deal activity in limbo as companies evaluate their new normal after record years due to government stimulus. ARM companies anxiously awaiting 2023 tax return season to determine their outlook.
By CAS November, 2022
The accounts receivable management vertical had a decrease in deal volume in Q3 2022, down 50% from Q3 2021 and 71% in deal volume from Q2 2022. In terms of deal volume, this has been one of the slowest quarters since the onset of the COVID-19 pandemic in Q1 2020. The industry is facing an interesting dynamic with placement volumes increasing from previous years of artificially low charge offs and placements, but liquidations are decreasing across most asset classes. Per data furnished by the Federal Reserve Bank of New York, credit card balances saw their largest year-over-year percentage increase (more than 13%) in more than twenty years as of Q2 2022 data to a total balance of $46B. In a write-up, the NY Fed mentions softness appearing and rising delinquencies among subprime and low income borrowers with rates reverting to pre-pandemic levels. In total, non-housing outstanding credit grew, but consumers are currently faced with a dynamic of choosing to pay between groceries, gas or other inflated goods rather than paying down existing debts.
A trend we have been monitoring at CAS is the pending student loan forgiveness ushered along by President Biden’s executive order. As of the time of this newsletter, there have already been 22M applications filed on the federal application portal. The forgiveness plan is being appealed in federal court after a variety of groups, including the states of Arkansas, Missouri, Nebraska, Iowa, Kansas, and South Carolina, have filed petitions regarding the constitutionality of the executive branch authorizing a plan of this scope and magnitude without Congress approval. This trend will likely come to a head after the midterms, where the Democrats hope to retain Senate control. The outcome will likely have an impact on consumer balance sheets as payments restart for federal student loan (about $1.6T outstanding before forgiveness) on January 1, 2023.
We at CAS have been beating the drum on the rise of buy-now, pay-later (BNPL) or point-of-sale credit extension. The CFPB recently issued prepared remarks about the industry and their potential areas of interest. In the remarks prepared, the CFPB lists a few concerns that we would like to expand upon. First, the BNPL marketplace is currently “in the shadows”. What they mean by this is that it is not currently reported as part of the Fed’s existing approach to measure total outstanding debt. Considering the potential rise in delinquencies to come in the unsecured credit card vertical, the BNPL wave could be a potential giant lurking in the shadows of delinquencies to compound the issue. The charge-off rates in BNPL have risen from 2.9% in 2020 to 3.8% in 2021 per the CFPB with data yet to come for 2022. Consider that charge-off and delinquency rates were falling in the credit card vertical during that time, and a potential narrative begins to weave together. This has potential to be a canary in the coal mine for the broader economy if charge-offs continue to rise in the BNPL vertical.
A notable transaction that took place in Q3 2022 was TrueML (previously TrueAccord) acquired Enhanced Recovery Corporation. We anticipate and expect to see further consolidating activity in the coming quarters as companies face the continued pressure of decreased liquidations, maintaining compliant with Reg-F, increased labor costs and inflationary pressure for vendors and suppliers.
There continues to be investor interest in the accounts receivable management vertical. New entrants to the market are coming from international domiciles with interest in entering various stages of the delinquency cycle. Companies like Sedric are working to automate and optimize the compliance protocols and procedures of agents in collection agencies, ArborKnot is taking a “consumer friendly’ approach to debt purchase, and Retrieval Alliance is taking a technology focused approach to commercial receivables. These companies signify a trend that we at CAS feel is validated; that there is market interest in the US accounts receivable management vertical given the sizeable market opportunity as we gear up for a potential economic downturn.
TrueML acquires Enhanced Recovery Corporation
CreditCorp (ASX: CCP) acquired Collection House (ASX: CLH)