For Cfs, Bad Debts Are Sweet Profits

Never heard of CFS? It's reaping eye-popping gains from delinquent credit-card loans

From his 55th-floor perch adjacent to the Oral Roberts University campus, William R. Bartmann is already plotting his next extravaganza. If June and July revenue targets are met, he will fly 4,500 employees and guests to Las Vegas in September for a mud-wrestling match: Bartmann vs. one of his top executives. The following month, he plans to take employees, filling 200 train cars, to a baseball game in Kansas City, Mo.

It's vintage Bartmann: big, bold, and flamboyant. The 48-year-old entrepreneur has followed the same path in building Tulsa-based Commercial Financial Services Inc., now the nation's biggest purchaser by far of delinquent credit-card debt written off by banks and other issuers. CFS buys the debt, then pools and sells it to institutional investors, while retaining and collecting on the accounts.

"POLITE PERSISTENCE." CFS has revolutionized the collection business. Bartmann was the first to securitize soured credit-card debt. And he has brought leading-edge technologies to what has been a mom-and-pop business. Using what one analyst calls "polite persistence" with debtors, Bartmann and his 2,350 employees--up from only 17 in 1990--collect far more than CFS pays for its accounts. "We don't think we have any competition at the moment," says Bartmann. Twelve-year-old CFS now manages a portfolio of about 2.5 million accounts with a face value of almost $8 billion, primarily credit-card charge-offs. CFS claims it will have 43% of the Visa/Mastercard charge-offs taken this year by the top 25 issuers while rivals have 1% to 2%.

So far, the emerging industry has proven wildly profitable for privately held CFS, of which the Bartmann family owns 80%. Last year, the company earned $137 million on revenues of $206 million. That's a huge net margin of 67%, mainly because CFS sells loan pools for far more than it pays. There is still plenty of business to tap as issuers see big advantages in selling their charge-offs: instant cash and reduced collection expenses.

Still, Bartmann's aggressive purchases and his company's supersonic growth have raised eyebrows among competitors. CFS this year will spend about $600 million to buy charge-offs with a face value of some $7 billion, more than double the volume of his closest competitors. Rivals contend that CFS grabs business by paying steep prices for charge-offs: as much as 10 cents on the dollar for freshly charged-off debts, or 20% to 50% more than competing bids. And CFS is aiming eventually to collect 30 cents on the dollar vs. the 15 cents to 18 cents major banks get. Critics say CFS won't be able to collect anywhere near its lofty estimates and may leave investors in a lurch. After all, the market for charged-off receivables is still relatively new, and buyers such as CFS have yet to face a severe economic slump. "It's possible for them to do what they say they do, but not easily," says Scott Lowery, president of Denver-based rival Collect America.

CFS, which has focused primarily on credit-card debt for less than two years, says the prices it pays for bad debt are backed by years of collection data fed into computer models that it uses to set its bids. And it enjoys key advantages over collection agencies working for a fee. As an owner of the accounts, CFS has more flexibility to cut deals with debtors to get settlements. And it works some accounts for as long as seven years.

Skeptics don't faze a tanned, trim Bartmann, who's planning still bolder moves. He'll soon open a London office to tap into the European debt market. And in January, he plans to start a separate entity to lend to current CFS "customers," as debtors are called internally. Only the accounts of customers who stick to a negotiated payment plan will be sold to the new company. And those customers will be offered increasing amounts of credit--from secured credit cards to home loans--based on payment track records.

RECESSION RISK? So far, Bartmann's high-wire act is a hit on Wall Street. All nine of his securitizations have won single-A credit ratings from Standard & Poor's Corp. Lily Cheung, a director at S&P, believes that the securitizations are substantially overcollateralized--with Bartmann's estimated recoveries on the portfolios far exceeding what he owes investors. While a recession could bring a substantial drop in collections, the structure of the deals "adequately insulates the investors so far," agrees Sean P. Sheerin, a vice-president at Duff & Phelps Credit Rating Co.

Investors seem content. "So far they have met their projections on collectability, but it's still early in the process," says Jennifer O. Quisenberry, vice-president at Structured Finance Advisors Inc., which has represented eight institutional investors in Bartmann's securitizations. Investors are lured by a yield that's about 215 basis points over Treasuries, vs. 100 to 150 on comparable investments with a 2 1/2-year average life, says Quisenberry.

CFS's success, though, is attracting growing numbers of rivals. Indeed, Bartmann's dominance could work against him, as credit-card issuers look for ways to ease their dependence on a single buyer. "I would envision the biggest competitors [to CFS] being the banks themselves," says Stewart J. Reale, senior vice-president of First Union Corp., which sells charge-offs to CFS.

Still, the barriers to entry are increasingly formidable. CFS has exclusive or near-exclusive "forward-flow" agreements to buy charge-offs at a predetermined price from 15 of the top 25 bank credit-card issuers, locking out competitors for one to five years. The deals lower administrative costs for the banks and ensure a constant flow of "inventory" for CFS. "If you want to come in and compete, you have to live off that which we don't have," brags Bartmann. More important, he says, is CFS's reputation for ethical dealings in an industry still plagued by abusive and questionable tactics--a claim rating agencies generally support. Banks are leery of handing over their customers--even bad ones--to companies that might hurt the banks' reputations.

There's no denying that Bartmann has built a powerful collections machine since he and his wife, Kathryn, first started collecting on nonperforming Federal Deposit Insurance Corp. loans in 1986 from their kitchen table in Muskogee, Okla. Along with partner Jay L. Jones, the couple changed their focus to credit-card debt as bank failures dwindled.

Bartmann credits CFS's success to careful screening and lengthy training of employees, who are then armed with the best technology in the business. CFS will spend about $60 million this year on hardware, software, and development, overseen by a 75-person information technology department. CFS has a sophisticated "skip tracing" system that tracks down debtors who have moved or changed phone numbers by electronically searching more than 50 databases. Automated phone dialers "learn" the patterns of different accounts so they can call when debtors are likely to be home.

But Bartmann and backers say CFS goes beyond machines to a philosophy of respect for people. After finding himself $1 million dollars in debt when his oilfield pipe company went belly-up in the 1986 oil bust, he seems to understand the psychology of debtors. "You've got to be sympathetic; you've got to listen with your heart as well as your head." Bartmann says the script for his collectors ends with "Now what can we do?"

For Bartmann and CFS, the answer, so far, seems to be almost anything. Indeed, Bartmann claims that in recent months he turned down a $3 billion cash offer for the company. Why? "It wasn't enough. We're going places," he says. His investors and credit-card partners certainly hope so.

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