Debt Buyers' Association 7th Annual DBA Conference

Transcription

1 Debt Buyers' Association 7th Annual DBA Conference Mergers & Acquisitions of Debt Buying Entities KEEFE, BRUYETTE & WOODS Specialists in Financial Services Michael Ginsberg, President and Chief Executive Officer Lou DiPalma, Managing Director February 6, 2004

2 What is the current climate for M&A? What micro and macro trends exist? PAGE 2

3 Current Climate for M&A M&A beginning to play a more significant role in the debt buying industry Private Equity firms are buying minority stakes in larger debt buyers NCO Group, Inc. (NASDAQ: NCOG) acquisition of the outstanding shares of NCO Portfolio Management (formerly NASDAQ: NCPM) in December 2003 Consumer Portfolio Services (NASDAQ:CPSS) acquired TFC Enterprises, Inc. (formerly NASDAQ:TFCE) in April 2003 Cavalry Partners, LLC acquired First Credit Solutions in August 2002 NCO Group, Inc. (NASDAQ:NCOG) and NCO Portfolio Management (NASDAQ:NCPM) co-purchase GE Capital s Great Lakes Bureau and debt portfolio in August 2002 Interest coming from various types of buyers Financial buyers private equity and venture capital firms, high net worth individuals, etc. Strategic buyers debt collection agencies, domestic and offshore BPO companies, larger debt buyers PAGE 3

4 Micro and Macro Trends Impacting M&A Activity Macro Trends Abundant sources of capital less restrictive lending markets and significant private equity sitting on the sidelines Growing levels of charged off consumer debt Increased sales activity among telecom, utility and healthcare sectors Continued consolidation among credit issuers Credit issuers seeking to increase liquidity and reduce overhead costs Micro Trends Debt purchasing industry continuing to experience strong growth Superior ROI performance generating substantial investor interest Maturing industry Increased number of players, growing receptivity among creditors, technology advancements, market segmentation by size and industry specialization Buy vs. Build Increased competition raising the bar for new entrants Definable exit strategies have emerged PAGE 4

5 M&A Activity in the Small-Cap Public Markets M&A Activity in Small-Cap Public Markets (TEV: $20mm to $250mm) Deals Announced (Completed & Pending) E Source: MergerStat, Bryant Park Capital PAGE 5

6 Average Debt Multiples Average Debt Multiples of Highly Leveraged Loans x* 3.5x 4.5x 3.3x 4.0x* 2.9x x 3.9x 3.7x 2.2x 2.4x 2.3x 2.6x x 1.2x 1.2x 1.5x 1.4x 1.6x 1.5x Q'03 2Q'03 Non-Bank Debt/EBITDA Bank Debt/EBITDA *Rounding Error Source: Portfolio Management Data, Bryant Park Capital PAGE 6

7 What can a selling debt-buyer expect? What exit strategies exist? What is the public market activity in this sector? What are analysts looking for? PAGE 7

8 Consolidation Trends, Debt-Buying Industry: The first real wave of consolidation is more or less complete: Tier-1 companies are moving through the private-equity stage and into the public market: $100mm - $150mm gross revenues $20mm - $40mm EBITDA $2-3 billion (face amount) of debt acquired annually ($30mm - $60mm purchase value) Range of Multiples Private Equity: 6-10x Net Income 4-6x EBITDA Range of Multiples Public Equities: 13-21x Net Income PAGE 8

9 Private Equity Transactions, Company Name Transaction Executed Portfolio Recovery Associates Sale of minority equity stake to Angelo Gordon Asset Acceptance Corp. November 2002 Sale of majority equity stake to Quad-C Investors Arrow Financial Services August 2002 Sale of minority equity stake to Parthenon Capital $45 million acquisition-financing credit line Cavalry Investments, LLC November 2003 Sale of minority equity stake to Bear, Stearns B-Line, LLC December 2003 Sale of minority stake to private equity investor PAGE 9

10 Public Market Activity, : Data as of 01/14/2004 Portfolio Recovery IPO 3.9 mm shares $14.00 November 2002 Associates (PRAA): Follow-on 3.5 mm shares $25.50 May 2003 ENCORE Capital Group Follow-on 5 mm shares $11.00 June 2003 (ECPG) IPO 2.25 mm shares $10.00 July 1999 ASTA Funding Follow-on 2.5 mm shares $20.75 September 2003 (ASFI) IPO 1.2 mm shares $5.00 November 1995 Total Capital Raised, 2003: $ million Asset Acceptance Filed S-1 registration stmt. for initial public offering October 2003 PAGE 10

11 Public Market Activity, : Stock Price Data as of 01/14/ PRAA ASFI ECPG NCPM 12/31/ /08/2002 1/13/2003 PAGE 11

12 Public Market Activity, : Stock Price & Volume Data as of 01/14/2004 Portfolio Recovery Assoc Inc. Encore Capital Asta Funding, Inc. NCO PTFL Management Inc. PAGE 12

13 Public Company Profiles Data as of 01/14/2004 Portfolio Recovery Associates Asta Funding Inc ENCORE Capital Group, Inc. NCO Portfolio Management Group Ticker PRAA ASFI ECPG NCPM Current Price (close, 1/14) $ $ $ $ 8.47 IPO Price/Share: $ $ 5.00 $ n/a IPO Date 2-Nov Nov-95 Jul-99 n/a 52-week high price $ $ $ $ week low price $ $ $ 1.05 $ week high date 17-Jun-03 8-Jan Jul-03 7-Jan week low date 11-Mar Jan Feb Jul-03 Shares outstanding 15,209 6,627 21,303 13,577 Market Cap ($mm) $ $ $ $ Trailing EPS $ 1.21 $ 2.24 $ 1.10 $ 0.48 Trailing P/E 20.12x 15.61x 13.64x 17.65x PAGE 13

14 Exit Strategies IPO: Portfolio Recovery Associates (PRAA) Encore (ECPG) ASTA Funding (ASFI) Corporate Acquisition/JV: Sherman Financial (MGIC/PMI/Radian) Worldwide Asset Management (Goldman) - Financial-services companies - Business-services companies Structured asset sale: Rated/unrated trust sale Typically one investor Servicing-retained with priority servicing-fee payment Follow-on private equity sale PAGE 14

15 What are business buyers looking for in this market? What adds to or detracts from value? PAGE 15

16 What business buyers are looking for in this market Management team comprised of seasoned veterans who are experienced with all facets of the business. Proven track record of purchasing and collecting larger volumes of debt. High levels of sustainable profit margins Direct access to credit issuers Industry specialization (bankcard/credit card, medical, telecommunications, etc.) Combination of internal and external collection capability; maintain a competitive environment while maximizing shareholder value Ability to mirror future monthly cash flow budgets to actual performance PAGE 16

17 What adds to or detracts from value Adds to value Consistent top and bottom line growth Ability to accurately forecast future cash flow streams from purchased debt portfolios Direct access to credit issuers Niche specialization industry or paper type (fresh, prime, seconds, etc.) Exceptional management teams with proven track records. Detracts from value Inconsistencies in revenue or profit performance Inability to purchase debt directly from credit issuers Poor performance on previously purchased debt portfolios Inability to effectively integrate the debt purchasing and recovery aspects of the business Inability to track performance and progress on a particular debt portfolio PAGE 17

18 What effects will the recent flurry of investment activity have on debt purchasing? What effect is consolidation having in the market? What effect will it have on pricing? PAGE 18

19 Consolidation Effect: Debt-Buying Industry Larger Tier 1 firms are coalescing into a dominant purchasing block Opportunities broaden with consolidation: Access to more favorable financing Ability to purchase larger deals Broader name recognition with creditors/sellers Consolidation expected to beget further consolidation through follow-on acquisitions and joint ventures: Cavalry s acquisition of First Credit Solutions and Conseco MH platforms, 2002 Buyers moving to diversify revenue streams: Portfolio acquisitions Third-party contract collections Resales Financing downstream buyers PAGE 19

20 Distressed Debt Market: Consolidation Effects The first stage of consolidation capitalization of Tier 1 buyers is already having a notable effect on both pricing and product flows: Debt buyers have become more aggressive as capital inflows have increased demand for product: Increased investment = higher equity Greater access to lower-cost debt Economies of scale More large deals, higher average deal size Tier 1 buyers gaining increasing share of primary creditor-seller market PAGE 20

21 Distressed Debt Market: Consolidation Effect Larger buyers larger deals Large sellers have greater competition for deals Largest buyers control more product, and have become an alternative primary market source for smaller buyers: Resale is a more accepted practice Staking new ground -- increased demand for alternative asset classes: Deficiencies Older paper Small-balance accounts Opportunities: Specialization Financing and acquisition JVs PAGE 21

22 Pricing Market has changed large-deal discount to a premium Margins still good due to economies of scale and lower-cost financing Demand shift to more off-the-run product is shrinking the pricing gap between newer and older paper Older paper strongest pricing gains Newer paper slow rise through 1 st half of 2003, now stabilizing 2004 general upward pricing movement PAGE 22

23 Will there be a consolidation among debt buyers? What will the M&A marketplace look like over the next 3 years and beyond? PAGE 23

24 Capital Markets/M&A Outlook: Next 3 years 2-4 more IPO s Larger buyers diversify Consolidation is inevitable as a growth vehicle for large firms Resale becomes increasingly important: Small buyers become more efficient JVs and alliances with large buyers Overseas expansion PAGE 24

25 Capital Markets/M&A Outlook: What s Next Smaller-size debt buyers: $35mm - $50mm annual revenues $5mm - $15mm EBITDA Specialized buyers: Deficiencies Paying accounts Subprime consumer finance Bankruptcy Service receivables (telecom, utility, etc.) Commercial and mixed-asset debt buyers Pre-charge-off nonperforming loan buyers, esp. commercial PAGE 25

26 Capital Markets/M&A Outlook: Opportunities What does the future hold for smaller/newer debt buyers? Outside capital investments will be available to select smaller/newer debt buyers Acquisition by larger debt buyer Specialization affords opportunities for financing/collection JVs with larger buyers Increased volume of debt purchases through resales by larger/national debt buyers Traditional account-purchase supply will be available PAGE 26

27 Debt Buyers' Association 7th Annual DBA Conference Mergers & Acquisitions of Debt Buying Entities KEEFE, BRUYETTE & WOODS Specialists in Financial Services Michael Ginsberg, President and Chief Executive Officer Lou DiPalma, Managing Director February 6, 2004