Trader’s bets against debt collector sink £1bn flotation

A HEDGE fund’s bet that toxic debt is back has helped kill off one of the year’s biggest stock market floats.

Bybrook Capital believes that debt collectors, who have been buying up piles of loans at the low-income end of the borrowing market, will never be able to recover many of them, and is braced to clean up if shares in the affected firms plummet.

Its gloomy view has now contributed to collection firm Cabot Credit Management abandoning a plan to go public for £1bn later this month.

Sources said Cabot has become concerned by the share price performance of its closest rival, Arrow Global, which has fallen 10pc since last week.

Both companies buy overdue credit card and other unsecured debt from banks and lenders, then chase individuals for the unpaid money. Cabot has bought £21bn of debt since it was founded in 1998, and is chasing around 7m people.

But, in Bybrook’s view, the industry is heading for a fall, and it has built up a 1.7pc short position in Arrow’s stock that will make money if the price drops. A source close to Cabot said: ‘There’s a lot of hedge fund shorting of Arrow and the sector in general.’

At a conference in Oslo last month, the hedge fund gave a presentation on the debt collection industry, entitled: ‘This is totally bonkers’. It said the shares of one firm had ‘no equity value’, adding that another’s debt might be ‘worth zero’.

The industry is mostly focused on small loans for people with very low pay, and it is not seen as large enough to cause wider economic damage if it fails.

Cabot was due to be chaired by Andy Haste after the float, a businessman who is chairman of payday lender Wonga.

Cabot boss Ken Stannard said: ‘The high level of engagement and interest we received from a wide array of investors was very encouraging, but the timing has been unfortunate with respect to initial public offering market conditions.’