Prices of bad-debt portfolios have gone up in recent weeks, with prices of fresh debt improving at a faster rate than older receivables, according to industry observers.
Fresh chargeoffs are selling in the upper end of the 3-cent-to-8-cent-on-the-dollar range. Older accounts, worked by more than one agency, are getting anywhere from fractions of a cent to 4 cents on the dollar.
Aaron Hadam, an executive vice president with the debt broker National Loan Exchange Inc. in Carlsbad, Calif., said the upward shift for fresh chargeoffs has not necessarily persuaded issuers to sell more.
What's more, the traditional yearend inventory sell-off failed to materialize in December. "Everyone expected a large boom and that didn't happen," said Robert Morris, the founder of the debt buyer Oliphant Financial Corp. in Sarasota, Fla.
Some insiders said the higher prices might not be sustainable because there is no evidence of a corresponding rise in liquidity. Buyers trying to obtain market share are driving prices higher, but liquidation rates on those accounts are not any higher than a year ago, said Stacey Schacter, the chief executive and president of Vion Receivable Investments in Atlanta.
And liquidity is unlikely to improve anytime soon, he said. Unemployment rates are high and employers are not doling out raises, so consumers still have less ability to pay their debts. Several states also are making it harder for debt buyers to sue, which further reduces liquidity.
Joel LeBlanc, a senior receivables management consultant at the debt buyer Square Two Financial (formerly Collect America) in Lenexa, Kan., said there appears to be a disconnect between what buyers are offering for delinquent accounts and what creditors believe the portfolios are worth.
With liquidation rates low, buyers are trying to drive down prices even as banks continue to expect more, Morris said. If they do not receive the right price, issuers typically react by placing accounts with agencies instead of selling. With fewer portfolios on the market, prices are naturally driven higher, thus making it harder for buyers to find value.
Yet a willingness in the industry to complete deals should keep prices on the high side of the 3-cent-to-8-cent spectrum, LeBlanc said.
Schacter, however, said he believes that prices ultimately will either stabilize or fall again because of liquidity concerns, even if they continue to rise in the short term.
Louis DiPalma, a managing partner at Garnet Capital Advisors in Harrison, N.Y., said pricing is a statement of future cash flow, and anything that decreases cash flow decreases prices.