WAM to Reduce Debt Buying in 2008 Over Funding Flap

Bad debt buyer and collection agency West Asset Management (WAM) said in a conference call Thursday that it would scale back its debt buying through the end of 2008 as the lead funder for its portfolio purchases reviews their lending agreement.

On Wednesday, West said that its WAM unit recorded lower revenue and net income for the quarter and that its portfolio purchasing funding partner, CarVal – a unit of Cargill Financial Services – was trying to change the terms of its agreement (“Debt Buyer and Collection Agency WAM Takes a Hit in First Quarter,” April 17).

In a conference call with analysts to discuss parent company West Corporation’s results for the first quarter of 2008, much of the time was spent discussing the accounts receivable management unit known as WAM.

Tom Barker, West’s CEO, said on the call that the change CarVal wants would be detrimental to WAM. As such, the company is looking for another partner or for alternative sources to fund its debt buying activities. In the meantime, WAM does not anticipate making any portfolio purchases for the remainder of the year outside of the forward flow agreements already in place, which Barker classified as “very small.”

“Our current guidance does not call for any additional portfolio purchases beyond the flow agreements,” said Barker. But Barker noted that the vast majority of current revenue comes from purchases that have already been completed and that the issue would not impact West’s earnings.

Barker explained that WAM had initially partnered with CarVal as it ramped up its debt-buying platform. Along with the funding, CarVal offers portfolio evaluation services that WAM no longer needed, Barker said. WAM is currently exploring other funding opportunities, including traditional financing from banks, said Barker, who noted that CarVal was “not inexpensive.”

One industry expert said that the issue is not exactly shocking. “We are not surprised that a company of the size and stature of WAM in the debt buying market is seeking alternative, and cheaper, funding sources for its portfolio purchasing activity,” said Mark Russell, director of ARM advisory firm Kaulkin Ginsberg.

The West team also explained the unit’s $24.2 million impairment charge on purchased portfolios it took in the quarter. Barker explained that the charge was for WAM’s entire portfolio that the company expects to generate more than $350 million in revenue over the long term. The impairment was blamed on a “weaker than expected collection environment.”

Further explaining the collections environment in response to an analyst’s question, Barker hinted that things are not improving. “March was a tougher month than January,” he noted when asked to assess the market over the quarter.

Paul Mendlik, West’s CFO, noted that tax refund liquidation in the quarter was not as high as the company is accustomed to seeing. Collection agencies typically see a spike in consumer payments in the first quarter as early tax refunds are applied to household debt.