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Posted - 03 October 2007 : 10:45:44
IVA shares plunge amid profitability concerns
Shares in debt management companies plunged yesterday after one leading player warned that the market for individual voluntary arrangements - which allow people to restructure their debts and avoid bankruptcy - had become much tougher.
Debtmatters saw its share price fall 73% after announcing it was scaling back its business because of concerns that it "may no longer be able to deliver IVAs profitably".
The announcement sent shockwaves through the sector. Shares in rivals Accuma and Debts.co.uk fell 23% and almost 21% respectively, while Debt Free Direct, which claims to be "the market leader in providing services to over-indebted customers," ended the day down 29%.
IVAs are an alternative to bankruptcy that allow people with debts to agree a five-year deal of fixed repayments with their creditors. IVA companies, many of them advertising on daytime TV and internet search engines, promise to reduce the level of debt to be repaid, sometimes by as much as 75%.
But they have often been accused of encouraging people with large debts to agree an IVA rather than an informal deal with creditors.
Banks and credit card companies have recently started taking a much harder line, cutting back the fees they are prepared to pay and sometimes refusing to accept an IVA as it might mean they eventually recover only a small proportion of what they were owed.
The share price falls prompted Debt Free Direct to issue a statement in which it confirmed the sector was undergoing a "shake-out [that] will have its casualties".
It said: "However Debtmatters' concern that they 'may no longer be able to deliver IVAs profitably' is not one we share."
It said IVAs would remain of "fundamental importance to the UK banking industry and government policy."
Last year saw a record 107,000 insolvencies, 44,000 of which were IVAs. That has generated big profits for some of the main providers. Whereas informal arrangements can be agreed with no charges by debt advice charities, IVAs can generate fees of up to £7,000 for the companies involved.
However, the sector has become more competitive as an increasing number of firms have tried to cash in on the debt boom and banks have become more demanding in their terms for agreeing debt reorganisation plans.
In a trading update yesterday, Bolton-based Debtmatters said: "IVA case acquisition costs have risen sharply in the face of rising competition, and IVA conversion rates have worsened due to hardening creditor attitudes, which have impacted on margins."
It added that some creditors were attempting to push down its fee levels. "The impact of these additional changes on the IVA business could be significant. Should these fee modifications become the norm, then we may no longer be able to deliver IVAs profitably."
Debtmatters has suspended all direct advertising on TV, radio and in the press. In addition, the IVA division would be "scaled back," with staff redeployed into other areas. The company also announced a strategic review of the business, which could lead to a sale of the company.
Stockbrokers Shore Capital said it was maintaining its "sell" recommendation on the IVA sector as it was anticipating "further bad news" in profit expectations.
Source: guardian.co.uk
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