It couldn't happen to a more worthy industry -
"Debt Crunch
By David Stevenson 1 October 2007
Debtmatters (LSE: DEBT) gave investors a six month update today. It was news they definitely didn't want to hear. Because the market price was clobbered a whopping 73% (yes, you read it right) to an all-time low of 18p.
And this for a stock that just over a year ago was changing hands at the dizzy heights of 388p.
So what has hammered the debt advisor's shares so hard?
After all, according to the company, the debt management division has made a 'pleasing start' since launch in July, and the loan broking subsidiary continues to grow in line with management expectations.
But serious problems have emerged within the division that provides Individual Voluntary Arrangements (IVAs). These are designed for people with serious debt problems and are pledges between debtors and creditors that freeze loan interest and slash debt repayments.
As the company pointed out, the uncertain outlook surrounding IVAs has been well documented. Indeed I described some of the issues six weeks ago in Big IVA Problem. Though it now seems that things have got a lot worse.
The cost of getting business has risen sharply, says Debtmatters. IVA 'conversion' rates, i.e. the number of cases where agreements can be successfully reached, have 'worsened due to hardening creditor attitudes'.
Pivotally, the chat between the British Banker's Association and the Insolvency Service has failed to reach firm answers on the thorny issue of charges that Insolvency Practitioners (IPs) like Debtmatters can levy.
Then here came the clincher. The company has disclosed that pressure from creditors (mostly the banks) to slash fees could be now tough enough to wipe out any profits from arranging IVAs.
So Debtmatters has put all its TV radio and press ads on hold and has 'scaled back' the IVA side, moving staff into other parts of the business.
Debtmatters is not the only IVA provider to get walloped today. Debt Free Direct (LSE: DFD) dropped 30%, Accuma (LSE: ACG) was axed 23%, Debts.co.uk (LSE: DETS) declined 20% and Edinburgh based Invocas (LSE: INVO) lost 16% of its value.
My colleague Neil Faulkner has written today about what this means for anyone thinking about taking out an IVA.
So I'll stick to the stock market view.
Not surprisingly, Debtmatters management is pretty cagey about the outlook. A full 'strategic review' has been launched which might result in the business being put up for sale. Although as the company points out, there is no guarantee that anyone would be interested.
The company's market value has now diminished to below £5m, extraordinary for a firm that raised £3m of fresh capital in July by knocking out 2.6m shares at 113p a shot. Amazingly, at that time the chief executive ploughed in over three-quarters of a million pounds of his own cash.
Let's look at what the business might be worth now.
I think we can for the moment safely assume that all earnings forecasts will be downsized big-style, meaning the balance sheet has to give us the best clues as to what any potential buyer might pay.
On first reading, there does appear to be something of worth here. The last published figure shows net assets per share standing at 57p, more than a 300% premium over the current share price.
But closer examination reveals rather less good news. All, and indeed more, of those assets are represented by goodwill bought as part of the purchase of Loanmakers in June 2006*. Whilst this bit of the business is apparently doing OK, trying to value it in the current environment could be tricky.
So the bottom line on value is...probably not a lot! I'll be doing some more work on this one because at the end of the day there's still a big UK debt mountain out there and it does need tackling by somebody. But I won't be recommending shares in debt advisors at the moment."