Profiting from debt

Following last week's debut, the opening price of Kredyt Inkaso's (KI) rights to shares rose by nearly 25 percent and reached zł.14.99, compared to the issue price of zł.12.

"We are very happy with the growth [in the stock price]. It shows that our strategy is being implemented. We expect stable and dynamic growth without any significant fluctuations. Being listed on the Warsaw Stock Exchange will increase our credibility and will allow us to move a few steps up on the market," says Artur Górnik, president of the Zamość-based KI.

The company offered 1.25 million B-series shares. Of that, 875,000 were designated for institutional investors and 375,000 were acquired by independent investors. The reduction rate amounted to 97.71 percent and the shares were bought by 346 investors. KI raised zł.13.9 million from the debut.

Strictly legal

KI operates on the financial services market. It buys and collects debt packages which are regarded by the original creditors as too difficult for them to collect on their own. In order to reduce the risks associated with debt collection, the company works in collaboration with a specialized law office and uses legal proceedings to move cases forward.

Andrzej Rabenda, an analyst from DM IDM, says this business model, unlike so-called "soft" debt collection, is more economical, since according to Polish law, once a debt-collection agency is hired, the indebted party is liable for the costs required to obtain the money from him/her. "It results in the greater effectiveness and security of the business and simultaneously reduces costs," says Rabenda.

He adds that this business model also allows the company to obtain revenues from debts up to 10 years after the debts were incurred. "This is possible because according to legal procedures, such cases don't fall under the statute of limitations until 10 years have passed," says Rabenda.

On call

Currently, 89 percent of all debts purchased by KI are owed by individuals, while the remainder are owed by institutions. The company's main customer is Polska Telefonia Cyfrowa, the operator of Era, and the company operates almost exclusively in the mobile telecommunications sector. Over the last five years, the companies have signed 20 debt transfer agreements, on the basis of which KI has obtained the right to collect debts in over 30,000 cases. "Our cooperation with Polska Telefonia Cyfrowa has been good, and we hope it will remain so in the future, but we also want to collaborate with others. The debut gives us funds which will enable us to buy more liabilities and start collaboration with additional partners," says Górnik.

According to Górnik, the company is also planning to develop new services and products to provide an alternative to those offered by its competitors.

"We need to be aware that the market has been growing since the end of the 1990s," says Górnik. "There are new mass services available which can generate debt, such as mobile telephony, internet access solutions, digital television, etc. Such new services will constantly be implemented by providers. This will result in a growing level of debt. The same is true of existing services where the number of users is constantly growing," he adds.

Bank on it

But KI is also looking to enter other segments of the mass-liabilities market. "We also hope to initiate cooperation in the banking sector, which has been rapidly growing for the last couple of years," says Górnik. "Again, there are new products - the value of mortgages is skyrocketing. If we are able to generate the same returns from the banking sector as we have done so far [in the telecommunications sector], we will definitely enter this market. We have such plans in place and talks are now in progress. The first announcements will be made at the end of the year." Górnik adds.

IDM's Rabenda says that since mortgages and loans are increasingly popular, the company can count on growth regardless of whether it enters the banking sector or not. "The fact that people take loans and mortgages is an advantage for the company," says Rabenda. "If the financial situation of a given consumer gets worse and they have both a mortgage installment and an invoice for their mobile phone to pay, any rational person would make the mortgage payment first. Then there is room for debt collectors to act," he explains.

Burgeoning debt

It is hard to estimate the value of unpaid liabilities in Poland. Market analysts and debt collecting companies agree that the total amount of liabilities ranges from zł.25 billion to zł.120 billion, with half of that owed by individuals.

The Gdańsk Institute for Market Economics (IBnGR), in a November 2004 report, estimated the growth of the debt market at 15-20 percent per annum. The nominal value of liabilities taken over by debt collectors in 2003 amounted to zł.4.5 billion. In 2005 it reached some zł.6 billion. Statistics show that in Q1 2007, nine of the largest debt-collecting companies purchased debt with a nominal value of zł.1.5 billion.

Piotr Krupa, president of Kruk, one of the leaders on the debt-collection market, says that within the next three to four years, the total value of unpaid liabilities will increase by 30 percent per year. "One can be sure of this rate of growth as it has remained steady for the past few years," he says.

Błażej Lepczyński, an economist from IBnGR, says Poles' debts will grow. "Banks are liberalizing their loan procedures and aiming at people with lower incomes. It is estimated that currently there are around 300,000 heavily indebted people in Poland," he adds.

This will undoubtedly generate increased revenues for debt collecting companies. KI expects this financial year's revenues to reach zł.9.07 million and net profit to come in at zł.3.31 million. In the next financial year, it expects revenues of zł.12.09 million and net profit zł.4.20 million.

"Our Q1 result roughly amounts to one fourth of the prognosis for 2007. I am very optimistic," says Górnik.

Debt consolidation

In the meantime, KI is closely watching competitors such as Best, Kruk and Ultimo. Kruk's Krupa believes consolidation of the market will soon take place. "The size of some of the debt-collecting companies indicates that merging them into one company would result in synergy. As a result, a company will emerge with a higher operational potential," says Krupa.

Górnik believes that consolidation will start at the end of this year. "KI would like to take part in it," he adds.