Profile: Portfolio Recovery Associates Inc (PRAA.O)

Portfolio Recovery Associates, Inc. is a full-service provider of outsourced receivables management and related services. The Company’s primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. These are the unpaid obligations of individuals to credit originators, which include banks, credit unions, consumer and auto finance companies and retail merchants. The Company also provides a range of contingent and fee-based services, including collateral-location services for credit originators via PRA Location Services, LLC (IGS), audit and debt discovery/recovery services for government entities through PRA Government Services, LLC (RDS) and MuniServices, LLC (MuniServices). On July 1, 2008, the Company acquired 100% of the membership interests of MuniServices. On August 1, 2008, the Company acquired Broussard Partners and Associates, Inc. (BPA).

The Company’s portfolio of defaulted consumer receivables includes a set of accounts that can be categorized by asset type, age and size of account, level of previous collection efforts and geography. To identify attractive buying opportunities, the Company maintains a marketing effort with senior officers contacting known and prospective sellers of defaulted consumer receivables. It acquires receivables of Visa, MasterCard and Discover credit cards, private label credit cards, installment loans, lines of credit, bankrupt accounts, deficiency balances of various types, legal judgments and trade payables, all from a variety of debt owners. These debt owners include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, insurance companies, medical groups/hospitals, other debt buyers and auto finance companies. In addition, the Company exhibits at trade shows, advertises in a variety of trade publications and attends industry events in an effort to develop account purchase opportunities.

The Company has done business with consumer lenders in the United States. The Company has acquired portfolios at various price levels, depending on the age of the portfolio, its geographic distribution, historical experience with a certain asset type or credit originator and similar factors. A typical defaulted consumer receivables portfolio ranges from $1 million to $150 million in face value and contains defaulted consumer receivables from diverse geographic locations with average initial individual account balances of $400 to $7,000.

The age of a defaulted consumer receivables portfolio is an important factor in determining the price, at which the Company will purchase a receivables portfolio. The accounts receivables management industry places receivables into categories depending on the number of collection agencies that have previously attempted to collect on the receivables. Fresh accounts are typically past due 120 to 270 days and charged-off by the credit originator, that are either being sold prior to any post-charge-off collection activity or are placed with a third-party for the first time. Primary accounts are typically 360 to 450 days past due and charged-off, have been previously placed with one contingent fee servicer and receive a lower purchase price. Secondary and tertiary accounts are typically more than 660 days past due and charged-off, have been placed with two or three contingent fee servicers and receive even lower purchase prices. It also purchases accounts previously worked by four or more agencies and these are typically 1,260 days or more past due and receive an even lower price.

The Company acquires portfolios from debt owners through auctions and negotiated sales. It also acquires accounts in forward flow contracts. Its work flow management system places, recalls and prioritizes accounts in collectors’ work queues, based on analyses of accounts and other demographic, credit and prior work collection attributes. The majority of its collections occur as a result of telephone contact with consumers.

The collectibility forecast for a newly acquired portfolio helps to determine collection strategy. The Company may obtain credit reports for various accounts after the collection process begins. The Company’s computer system allows each collector to view all the scanned documents relating to the consumer’s account, which can include the original account application and payment checks. A typical collector work queue may include 650 to 1,000 accounts or more, depending on the skill level and tenure of the collector. The work queue is depleted and replenished automatically by Portfolio Recovery’s computerized work flow system.

The Company’s legal recovery department oversees its internal legal collections and coordinates an independent nationwide collections attorney network, which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions, determining the suit criteria, coordinating sales of property and instituting wage garnishments to satisfy judgments. This network consists of approximately 50 independent law firms who work on a flat fee or contingent fee basis. Legal cash collections constitute approximately 28% of total cash collections. The legal recovery department also collects claims against estates in cases involving deceased debtors having assets at the time of death. The Company’s bankruptcy department manages consumer filings under the United States Bankruptcy Code on debtor accounts. It has developed bankruptcy management system (BMS), a automated platform for providing bankruptcy notification services, filing proofs of claim (POCs) and claim transfers, managing documents, administering its case load, posting and reconciling payments and providing customized reports.

Revenues from IGS are accounted for as commission revenue. IGS performs national skip tracing, asset location and collateral recovery services, principally for auto finance companies, for a fee. RDS and MuniServices processes taxpayments and tax forms,collects delinquent taxes and earns a contingent fee. It also processes tax payments for taxing authorities. For this work, the Company is paid a fee for each transaction.