National Bank Benefits by Taking Out the ‘Garbage’

Credigy Ltd., the distressed-debt firm that got its start chasing delinquent credit-card borrowers in the U.S., has moved beyond collecting on bad loans to become one of National Bank of Canada’s fastest-growing profit contributors.

Credigy, which operates from a suburban office park north of Atlanta, holds almost $1 billion of consumer loans, auto debt and mortgages from the U.S., Brazil, Puerto Rico, Colombia and Spain, and is hunting for more deals in Europe. Half the firm’s revenue is now gleaned from performing loans bought at a discount from banks and other financial firms.

“We’re no longer a one-trick pony,” Jean-Guy Brunelle, Credigy’s chairman, said in a Sept. 23 phone interview. “We don’t just do the ugly. We do the good, the bad and the ugly.”

National Bank, Canada’s sixth biggest by assets, is cashing in on Credigy’s efforts eight years after buying an 80 percent stake in the firm. Credigy accounted for 4 percent of the bank’s C$1.19 billion ($1.07 billion) profit in the first three fiscal quarters, according to an Aug. 27 presentation. That’s double its share from a year earlier.

“Our growth rate is much greater than the rest of the bank and our plan is that should continue for some time,” Brunelle said.

Other’s Garbage

Credigy has diversified, buying and selling more types of consumer-loan portfolios while contracting out its U.S. collections efforts and adding a lending business for other debt buyers. The firm benefited last quarter from selling a portfolio of unsecured Puerto Rico assets to Encore Capital Group Inc., according to Brunelle.

National Bank, the Montreal-based lender focused mostly on retail banking in the French-speaking province of Quebec, is the second-best performing stock behind Bank of Montreal in the eight-company Standard & Poor’s/TSX Commercial Banks Index. The shares returned 16 percent this year to yesterday’s close, compared with the 3.6 percent return of the KBW Bank Index of 24 U.S. lenders. National Bank fell 0.8 percent to C$50.64 at 9:50 a.m. trading in Toronto.

An entrepreneurial push under National Bank Chief Executive Officer Louis Vachon, 52, helped guide the Quebec lender to a business others haven’t pursued, according to Brunelle. He said he doesn’t know any other Canadian bank that does this -- for good reason.

“It takes a lot of guts on the executive management to say that we’re going to buy what is otherwise a bank’s garbage,” Brunelle said. “It says ‘We’re going into the garbage business, we’re getting rid of this stuff’ -- that’s why no one else does it.”

Number Crunching

Competitors include Norfolk, Virginia-based Portfolio Recovery Associates Inc., San Diego-based Encore Capital and Sherman Financial Group LLC as well as private-equity firms and hedge funds specializing in distressed debt, Brunelle said.

Credigy’s advantage is how the firm crunches data to calculate the risk and price of debt portfolios, and to determine the most cost-effective way to collect, Brunelle said. The firm gained expertise with its 2002 purchase of 5 million delinquent credit-card accounts, its first acquisition. The experience helped Credigy develop a system to determine whether to bid on a portfolio that comes to market.

Here’s how it works: A company such as Citibank gives Credigy a portfolio of 300,000 names with three days to make a bid. Credigy runs the names through its system, scouring for social security numbers, addresses, phone numbers and details including education level, gender, home ownership and credit history.

Outside Contractors

“Then we price each of the 300,000, add it all up,” Brunelle said. “That’s how we come up with our price.”

Credigy pays from half a cent to 45 cents on the dollar for debt portfolios, Brunelle said. If they win the bid, Credigy takes over the asset and collects on the debt.

The firm no longer does its own debt collections in the U.S., using outside contractors instead as the industry faces greater oversight under the Consumer Financial Protection Bureau.

“We do very significant due diligence and audits on all of these suppliers on a continuous basis,” Brunelle said. “We have very, very few complaints compared to our competitors.”

National Bank bought a majority stake in Credigy for C$59.1 million in 2006. At the time, Credigy had $139 million of assets, according to an Oct. 9 presentation. That year, Credigy bought debt assets in Brazil and entered Puerto Rico’s consumer market. The firm started lending to other buyers of distressed assets in 2008, and three years later entered the European consumer market in Spain. By 2012, Credigy began buying performing assets.

‘More Comfortable’

Credigy employs about 125 people at its headquarters in Norcross, Georgia, with 500 workers in Sao Paulo and a 16-person office in Puerto Rico focused on mortgages. It also has two Spanish-speaking employees who oversee Spain and Colombia, Brunelle said.

“National Bank bought an opportunity and they’ve been gradually getting more comfortable with it,” Robert Sedran, a bank analyst with CIBC World Markets, said in an interview. “It’s a business that I think the market will become more comfortable with as we see its behavior through a cycle.”

Credigy is taking advantage of a regulatory environment in the U.S. and Europe that’s forcing many financial-services firms to boost capital and sell risky assets.

“A lot of financial institutions around the world that are trying to shrink balance sheets,” Brunelle said. “So we’re trying to take advantage of that market of buying non-core markets as they’re presented.”

U.K Opportunities

The firm is watching opportunities in Europe and the U.K. even as buying debt portfolios has become more competitive.

“England’s got a great base and great infrastructure, but there’s a lot of competition there and paper’s getting expensive,” Brunelle said. “We’re hoping to set up a partnership with a very large European player that would allow us to co-invest with them on large transactions,” Brunelle said, declining to list specific names.

Credigy’s performance is unlikely to woo bank investors who tend to favor more easily understood businesses such as personal-and-commercial banking, CIBC’s Sedran said.

“The businesses that are most favored typically by Canadian investors are those in which the visibility is, at least on the surface, the best,” Sedran said. “If you’re just buying and potentially selling and harvesting different kinds of performing loan books in different geographies it’s very difficult to have visibility into that business.”

Credigy’s longer-term outlook will depend on how big the business becomes and what kind of risks emerge, Sedran said.

“People think it’s a hugely risky business,” Brunelle said. “There’s nothing less risky than buying a million names at half a penny on the dollar.”

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