Banks' desire to 'hide' bad debts slows growth for Invocas

Published on Thursday 9 October 2008 21:20

INVOCAS, the debt services company, yesterday warned that its business in England is taking longer to build revenue than it expected.

The firm, which specialises in arranging repayment plans for people in financial difficulty, has been hit by the decision of the banks to make informal agreements with debt-ridden clients to avoid bad debt write-offs.

Shares in Invocas dropped by more than a third to a record low yesterday as the Edinburgh-based group warned that profit in the first half would be down on last year – and it did not expect to hit its full-year targets.

Earlier this year, the company launched a business in England offering individual voluntary arrangements (IVAs).

The arrangements are similar to the Scottish equivalent, protected trust deeds (PTDs), and consist of a formal agreement between individuals and creditors, spelling out how debt will be repaid.

While the company has unearthed a large amount of IVA leads, profit is only booked when the company formally signs the deals.

Invocas warned yesterday that it was roughly three months behind where it expected to be in terms of business generation.

Chief executive Steven Lightly said one of the reasons for the slow growth was a reluctance on the part of lenders to accept the deals, as these would require them to write down the value of debt from their balance sheets.

Instead the lenders, like banks, were opting to have informal arrangements with customers which often yield low returns from the banks

"Creditors are not too keen on IVAs because they are a trigger for them to make an impairment charge on their balance sheets," Lightly told The Scotsman yesterday. "Debt management plans don't require an impairment but IVAs do."

Lightly said the result was likely to leads to an understatement of bad debts on the part of banks.

"At the moment they're quite happy not having any more problems with their accounts, so they're quite happy to have what are probably lots of bad debts hidden in the debt management plan folder on their desk."

Lightly conceded a large part of the problem was also internal, with the time taken to get the business operating and for marketing to take effect "taking a bit longer than you would hope it would".

Shares in Invocas, which is listed on the Aim, plunged 17.5p, or 33.6 per cent, to 34.5p yesterday, after brokers Charles Stanley slashed its full-year pre-tax profit forecast by almost a third to 2.5 million.

The company's market capitalisation is now less than 10m, compared to more than 100m in 2006, shortly after it floated.

Lightly insisted that the underlying business was sound and its prospects in the future remained sound. "The fundamental underlyings are very good, the problem is in the medium term – we don't think we are going to be able to meet the projections we put out."

The groups corporate business, which deals with business insolvency in Scotland, had shown an increase in business in the first half, he said.