Despite weaker economy, Portfolio keeps buying new debt

The latest discounts at Sears, Kmart and Radio Shack are hard to miss. Like other retailers, they’re trying to snare some of the tax rebates now reaching consumers.

Debt collectors want to do the same.

“Everybody is trying to compete for available cash,” said Steve Fredrickson, chief executive of Norfolk-based Portfolio Recovery Associates Inc. “Every collector in America knows about those rebate checks and has their antennas up.”

The weakening economy provides a new challenge for the company, which has grown in its 12 years to become a major player in the collections industry. Fredrickson, its chairman, president and CEO, doesn’t downplay the effects of the tougher economic climate. But Portfolio, he asserted, has the resources to weather the turbulence and continue expanding.

It’s an industry that generates more profits than consumer affection. Individuals who fall behind payments to a credit-card lender, a consumer-finance company, a utility or hospital can expect to hear from a collector. Historically, collection firms handling bills on behalf of creditors have worked for a commission.

But the industry has changed, and Portfolio has been part of the force that’s reshaped the collections landscape during the past decade. Today, larger, financially stronger companies buy most of the defaulted consumer debt that they attempt to collect. They pay pennies on the dollar for it and hope to profit from the difference between what is paid and what is collected.

Fredrickson, who once worked on the floor of a Chicago commodities exchange and later for a major Chicago bank, launched Portfolio in 1996 with three colleagues at Household International, a consumer-finance company now owned by banking company HSBC.

Since then, Portfolio has acquired debt with a face value of more than $35 billion. More than 70 percent of it consists of debt on Visa, MasterCard and Discover credit cards.

The company now ranks among the nation’s major buyers of troubled credit-card debt. When measured by the face value of card debt bought, Portfolio was No. 2 in the volume of purchases during the 12 months through September 2007, according to The Nilson Report, a magazine that tracks the credit-card and payment industry.

To collect that debt, Portfolio relies on a half-dozen call centers, including one in Norfolk and another in Hampton. In March, it ventured overseas and began using a small call center in the Philippines with 50 college-educated collectors.

In contrast to U.S. companies that rely on call centers in India, Portfolio chose the Philippines because its residents are more familiar with American culture and their English is closer to what is spoken in the United States. That’s crucial for debt collection because “these are not calls for lost luggage,” Fredrickson acknowledged. “These are complicated and sometimes emotional conversations.”

Portfolio spent $263 million buying debt last year, more than twice what it spent in 2006. However, the rapid expansion of its Jackson, Tenn., call center to handle additional debt reduced its collectors’ productivity and contributed to a downturn in Portfolio’s first-quarter 2008 earnings.

Despite a 19 percent increase in the amount collected during the January-through-March quarter, Portfolio’s net income fell 8 percent from the year-earlier period.

The company’s shares, which trade in the Nasdaq market, have climbed 16 percent for the year to date, outperforming stock-market indexes. Still, the tougher economic environment recently prompted one brokerage firm, Davenport & Co. in Richmond, to scale back its estimates of Portfolio’s earnings for this year and next. Shares closed on Friday at $46.19, up $3.32 for the week.

Hoping to take advantage of the tax rebates, Portfolio is offering discounts to debtors if they begin making payments on what they owe. Having collectors who can track down debtors and negotiate a repayment plan is just part of Portfolio’s profit equation. Even more important are the calculations of what to pay for the debt being offered for sale.

“If you make a pricing mistake, it’s over,” Fredrickson said. “You cannot make up for it, no matter how good a collector you are.” The company, he added, plans to take advantage of two recent developments to continue growing: the increasing amount of debt put up for sale and slackening competition among the companies that buy it.

In contrast to some companies that buy debt, Portfolio has the resources to step up its purchases, Fredrickson said. Last week , its banks expanded Portfolio’s line of credit by more than 25 percent, to $340 million.

Others, too, see opportunities for collection companies in search of consumer debt. Because of the rising level of sour loans on banks’ books and the heightened pressure on their profits, 2008 “is likely to be a big sales year,” said Corrina Petry, executive editor of the trade journal Collections & Credit Risk.

The amount of defaulted debt put up for sale in a given year, said Petry, depends on how much of this debt that lenders want to shed and how determined they are to improve their earnings.

In addition to buying more debt, Portfolio continues to look for small, high-margin businesses related to debt collection that it can acquire, Fredrickson said. In recent years, it has purchased a Las Vegas company that helps auto lenders track down delinquent borrowers and their vehicles and a Birmingham, Ala., company that helps municipalities find and collect taxes they are owed.

Commissions from these and other fee-for-service businesses generated more than 16 percent of Portfolio’s $220.7 million in revenues last year, compared with 4 percent in 2003. Overall, it reported earning of $48.24 million in 2007, an 8.4 percent increase from $44.49 million for 2006.

Portfolio has adopted the slogan “We’re giving debt collection a good name.” Its rapid growth, however, has been accompanied by a chorus of complaints about some of the company’s collection tactics.

Bob Hunt, an economist with the Federal Reserve Bank of Philadelphia who has studied the debt-collection industry, said collectors play a crucial role in the nation’s financial-services industry.

“One reason why we have an abundance of unsecured consumer credit available is that lenders can expect to be repaid,” and collectors help that process, Hunt said. “Whether the industry is functioning as well as it should be is another question.” Given the nature of its business, complaints against Portfolio would be expected.

In its latest report on the company, the Better Business Bureau of Southeastern Virginia and Northeastern North Carolina said it processed 373 complaints during the past three years, including 238 closed in the last year. Portfolio, the BBB said, had a satisfactory record with the organization, didn’t have an unusual volume of complaints or any reported governmental actions involving its conduct.

But there are a slew of lawsuits filed against it, particularly by attorneys handling personal bankruptcies and other consumer-related cases. They contend that some of the debt that Portfolio attempts to collect isn’t legally collectible.

When a Virginia Beach couple, Jamy and Danielle Varona, for instance, sought court protection from creditors with a Chapter 13 bankruptcy last year, Portfolio and a handful of other collectors filed claims for old credit-card debts that the couple hadn’t paid. The statute of limitations for collecting these debts had expired, and there were no judgments against the couple for the debts, said Tom Dickenson, a Norfolk attorney who has handled the couple’s bankruptcy filing. When he challenged the claims, Portfolio and other collectors filed to remove themselves from the case.

Purchases of debt involving individuals in Chapter 13 bankruptcies is lucrative for Portfolio and other collectors because these debtors devise a plan to repay at least part of what they owe and make regular payments to a trustee. The trustee’s automatic distribution of payments to creditors increases the likelihood that collectors will be paid.

Dale Pittman, a Petersburg attorney who represents consumers in debt-collection cases, said that Portfolio and other collectors routinely file suits for debts that consumers may not owe. When collectors are challenged in court, he said, they rarely pursue these claims.

“The amount of collection abuse is increasing,” Pittman said. “Americans are deeply in debt, and this model consists of beating money out of people who don’t have it.”

Fredrickson, however, defended Portfolio’s pursuit of the debt it owns. The company, he said, takes state and federal regulations seriously and monitors its collectors for compliance.

“You have a lot of people who legitimately owe debt and put up a smoke screen to keep collectors at bay,” he said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com