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Banking chief executives might have had a quiet chuckle to themselves yesterday.
The current bane of their lives, the debt management companies who organise the Individual Voluntary Arrangements (IVAs) that have been causing the banks such headaches, saw their share prices hammered after two of them - including market leader Debt Free Direct - issued profits warnings at the end of last week.
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An IVA is essentially an alternative to bankruptcy - and their numbers have been soaring over the past year. The banks argue that this has been due to irresponsible selling of IVAs by the debt management companies, rather than irresponsible lending of money by the banking sector.
There's probably a grain of truth in that - but whatever the cause, is this the end of the line for the IVA market?
Debt management company Debt Free Direct warned on Friday, after the market closed, that competition from rivals and 'creditor posturing' - ie, a lack of co-operation from the banks - meant it would miss City hopes for 2007. Rival Accuma issued a similar profit warning during Friday's session. Shares in Debt Free Direct fell 36%, while Accuma shed another 20%, after more than halving on Friday.
Others in the sector, Debtmatters and Debt.co.uk also suffered double-digit losses - even though they said that trading was in line with expectations.
It's a big setback for one of the top growth stories of recent years. Personal insolvencies jumped 45% last year to 67,584 people. And IVAs - which allow debtors to repay a chunk of their debts and have the rest written off, while avoiding bankruptcy - have been a big part of this insolvency boom. Figures set to come out this week are likely to show that 45,000 IVAs were arranged last year, from just 6,295 in 2002, and more than double 2005's total of 20,293.
So why has the party suddenly ground to a halt? Well, one of the key problems is that you can't just say you want an IVA - a majority of your creditors have to agree to the deal. After all, they're the ones who are writing off a big chunk of your debt. And the banks have decided to stop playing ball.
As Philip Aldrick in The Telegraph puts it: 'For banks and other lenders, the rising amount of debt being written off means less of the capital is recovered. For insolvency practitioners [also known as debt management companies], it's a time of bonanza profits - paid for by the banks.'
The banks believe that insolvency practitioners have been selling their services too aggressively - and as anyone who has ever caught even a snatch of daytime TV in the UK will know, that's almost certainly true. Scattered liberally throughout the soaps and chat shows, most daytime advertising is either telling you to roll upyour debts into one big loan - or suggesting you can have the majority of your debt written off painlessly, simply by taking out an IVA. The first option is of course, nigh-on certain to lead you to the next, so there's a pleasing symbiosis there for everyone involved - but let's not digress.
These problems are being dealt with, in one way or another. Consumer groups have warned that vulnerable people are being sold IVAs when other options - including bankruptcy - might be more suitable. And the Office of Fair Trading is expected to crack down on advertising in the sector soon.
Of course, the banks have also been careless with lending - just as they're still being careless with mortgage lending - and they're looking for someone to take the blame. But more importantly, they want to make sure they are getting a decent return on the IVAs that they allow to go through. The Telegraph reports that the banks have set up a Debts Forum to 'establish a working protocol with IVA providers'.
They want 'some comfort that debtors will be able to keep up with IVA payments, and the level of fees paid to IVA providers to be performance-linked - paid only as long as the debtor keeps up instalments.'
We have tipped the debt management sector in the past - though the last time we wrote about such companies (you can read the piece here: How to survive Britain's debt crisis (/file/19620/how-to-survive-britains-debt-crisis.html)), we warned that increasing objections from the banks meant that the sector looked vulnerable to a crackdown of some sort.
But should you bail out now? Well, as James Quinn points out in the Questor column, 'markets tend to over-react' and that does seem to be the case with Debt Free Direct. The company has already said that it remains comfortable with forecasts for 2008, and even after forecasts for 2007 have been downgraded, the shares trade on a p/e of 14 times, says Quinn. And banks are not going to just abandon IVAs - the key point is that they just want to make sure they're going to make some money from them.
And the fundamentals remain very favourable for the sector. Given that the consumer still owes about £200bn on credit cards, as Charles Stanley analyst Ben Archer puts it: 'a 'proper' IVA remains a very valid solution for the heavily indebted.'
Oh, and just before we go - look out for an email from Money Morning later today about a service from MoneyWeek's resident shares expert, Paul Hill. Paul writes for the magazine every week, and also runs his own weekly email service whereby readers can benefit from his in-depth analysis of companies he believes are undervalued. Keep an eye out for the email - we think you'll be impressed by what you read.
Turning to the stock markets...
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In London, the blue chip FTSE 100 index closed 11 points higher, at 6,239. British Airways was one of the top risers yesterday on afternoon news that threatened strike action had been averted. For a full market report, see: London market close
Across the Channel, the Paris CAC-40 index ended the day 37 points higher, at 5,619. In Frankfurt, the DAX-30 closed at 6,726, a 35-point gain.
On Wall Street, stocks closed mixed as the falling price of crude weighed on the energy sector and the tech sector was boosted by announcements of innovations from Intel and IBM. The Dow Jones ended the day at 12,490 yesterday, a 3-point gain. The tech-heavy Nasdaq was 5 points higher, at 2,441, whilst the broader S&P 500 ended the day one point lower, at 1,420.
The Nikkei made modest gains of 19 points today to close at 17,490, although weaker-than-expected economic data led to investor caution.
Crude oil was trading at $54.33 a barrel this morning, whilst Brent spot was at $54.02 in London.
The price of spot gold barely changed overnight, and was at $642.30 this morning. Silver was slightly lower at $13.13.
And in London this morning, struggling retailer Woolworths was given a boost today as its wholesale subsidiary, Entertainment UK, won a contract to supply CDs, DVDs and games to Virgin Retail. Woolworths shares had risen by as much as 3.1% in early trading today.
And our two recommended articles for today...
Where next for the US stock market?
- Over-valued, over-bullish and over-bought: that's one expert's view of the US stock market. Its future direction will influence markets almost everywhere, including UK property - so what can we expect? John Robson and Andrew Selsby of RH Asset Management look at what the indicators are telling us now and ask: Where next for the US stock market?
How to make money with minimum effort
- When it comes to our investments, most of us are more apathetic than we'd like to admit. With that in mind, Merryn Somerset Webb picks her top long-term, low-risk shares. To find out how you could leave your investments for five years, unreviewed and unsold - and still make a decent profit - read: How to make money with minimum effort
