An Interview with Steve Fredrickson

By Patrick Lunsford, CollectionIndustry.com

Steve Fredrickson, CEO of leading debt purchaser Portfolio Recovery Associates, spoke with CollectionIndustry.com recently about the current debt purchasing environment and his company’s success in it.

What is your take on the current debt purchasing environment, in regards to pricing?

We continue to see the market as very competitive. In fact, we see it as bumping up against what we consider to be rational pricing.

Do you see sellers’ expectations as being a driving force behind the higher pricing?

This is a question that I hear from time to time, and I think it actually mischaracterizes the essence of the debt sales market. Generally what we see are sellers of product bringing their receivables to market, and they generally are putting them up for sale on some kind of a competitive basis. The market then determines what that selling price is. In the vast majority of cases, the seller will then let those receivables go at whatever the market selling price is. It’s much more of an exception when a seller decides not to sell at whatever the market price is. In the cases where a seller says, “I have a portfolio for x price,” a lot of times the seller will wind up with no sale. Maybe that is more of the rule in the resale market, but we’re not as involved in that market.

How can debt purchasers get in trouble in this current pricing environment?

A debt buyer has to make sure, when pricing any portfolio, that they understand what that portfolio’s collectability is. If you are a good pricer, and you understand what kind of liquidation results you?re going to get on any given portfolio, then increased pricing really impacts your return. When you lose that pricing discipline and price a portfolio more to the market rather than to your models, you get into a situation where you may be looking at problems because your liquidation rate is not going to be what your assumptions were going into the purchase.

Telecom portfolios have gotten some talk lately. How do you deal with them?

We believe that any type of receivable at any point in the collection spectrum can be attractive if the price is right. So we don’t really categorize any one asset class as more attractive than another asset class. We price each particular pool based on its own attributes and take it from there. So we don’t shy away from telecom, or any other asset class. But if we don’t see appropriate collectability from our models, our pricing is not going to be as competitive, so we aren’t going to be buying much of it. And that’s what we’ve generally seen with telecom portfolios in the past few years. We buy it on a regular basis, but overall it’s been a pretty small piece of what we buy.

What about other asset classes? Do you purchase portfolios from all corners of the market?

I think we own a little bit of just about every asset class that I can think of.

What type of analytical scoring goes into your pricing? Do you have a proprietary model?

Since pricing is so important to success in debt purchasing, we feel that it’s an expertise that you absolutely have to develop in-house. We also feel that the liquidation rates attached to any given portfolio is a function of the particular collection shop that will be doing the collecting. So we don’t believe that there is any inherent amount of collectability in a given portfolio. I think that a portfolio may liquidate one way for us and another way for another collection shop. I think that a lot of the third-party models are never going to be as good as someone’s homegrown captive model in determining exactly how that paper is going to liquidate for your shop. So we do use our own proprietary model not only in pricing, but in segmenting work efforts after acquiring the portfolio.

So when it comes to collecting, how does Portfolio Recovery Associates deal with liquidation?

We collect on the portfolios we buy. Of course, the preference would always be to get the account paid by sending a letter, but that is seldom the case. The majority of our collections are driven through telephone work. About a third of our collections come in through legal activity. We would always prefer not to use legal activity, but there are consumers out there that won’t respond to anything else.

How many collection facilities do you have?

We have three collection facilities in Virginia. One houses our collection agency and two centers for our owned portfolio business. We also have an owned portfolio call center outside of Wichita, KS. Then we have two other subsidiary operations in Las Vegas, Nevada and Birmingham, Alabama.

Do you use offshore facilities to help collect on some of your debt?

We do not. We have done some small-scale experimentation with it in the past. But we believe that the offshore collection experience is more appropriate for early stage delinquency. As accounts become more and more delinquent, the likely successful talkoffs become more and more complicated. And we feel that it is a job that is more well-suited for someone here in the U.S.

What about purchasing offshore accounts for collection?

I think that anyone who is looking at offshore purchasing opportunities shouldn’t delude themselves into thinking that what they do well here in the U.S. will work on accounts from another country. We are strong believers that to be successful outside of the U.S., you’ve got to have a very strong local partner that can actually effectuate the collection process.

Last summer, you purchased a government-focused collection and servicing firm. Was this part of a broader diversification effort at Portfolio Recovery?

Well we view ourselves as an accounts receivable management firm in the broadest sense. So over time, we would like to be able to service many — if not all — of the segments of the industry, whether we develop that capability from scratch, acquire a foothold by hiring a management team or acquire a platform outright. We are going to go about it very patiently and take our shots where we feel it’s appropriate. But over time, we would like to serve the needs of anyone that has accounts receivable management requirements.