In the fall of 2008, Al Zezulinski, at NCO Group Inc., would have expected bad-debt sales to have improved more than a year later. "We’re not seeing it,” says the executive vice president at the Horsham, Pa.-based accounts receivable management company.
“Clearly, at some point the market will come back. I don’t know if it will come back the way it had during the golden years [roughly three to six years ago]. We still have to see how the consumer economy revives itself before we can really make any solid predictions with regard to the debt-buying market.”
Spending on credit cards has changed dramatically as issuers cut back on the amount of credit they grant to consumers. Zezulinski believes this is a long-term trend that will be felt in the debt-buying industry for years, as there will be less credit card debt for sale in the future.
This shrinking market “might mean prices go up,” Zezulinski tells Collections & Credit Risk. “On the other hand it also might mean there are fewer buyers.”
Industry experts agree debt prices will remain low, if not sink lower, as public creditors rid their books of bad debt by the end of the year, resulting in a flood of debt hitting the market. The earliest that pricing will rebound is during the first quarter of 2010, they say.
“You are going to see a lot of paper on the market in November and December and it is going to drive bids down because debt buyers can’t bid on every deal,” adds Mike Varrichio, president at Global Acceptance Credit Co., an Arlington, Texas-based debt buyer.
After pricing bottoms out, Varrichio expects some stability for the next couple of years, with prices rising as the economy improves. “ I don’t believe we will see a quick recovery,” he adds.
Lou DiPalma, managing partner at debt broker Garnet Capital Advisors, based in Harrison, N.Y., says if optimism in the economy continues, prices could increase 15% from their current rates going into the first quarter. But DiPalma says prices will not completely rebound to their 14-cent level.
Financing Factor
The lack of capital available to finance debt purchases is a huge problem that has forced many buyers to wait. “Financing is the biggest hurdle [the debt-buying industry] faces right now,” says Steve Lubelfeld, chief financial officer and managing partner at Resurgence Financial, a debt purchaser in Northbrook, Ill. “Financing sources are skittish.”
Today’s climate bears little resemblance to the boom times of 2004-2006. Along with more traditional lending sources, hedge funds at that time flooded the debt-buying market with capital. They were eager to profit from what had emerged as a new asset class. Debt buyers tapped into hedge funds as a financing source and prices for debt soared.
At the same time, charge-offs were performing well and the consumer could borrow against home equity to pay off debts. It created, among some big debt buyers, “a false compulsion to purchase,” Robert A. Morris, president at Sarasota, Fla.-based debt buyer Oliphant Financial, tells Collections & Credit Risk. The tendency was to not examine the deal critically, but to buy simply to “keep the animal” fed, he says.
That formula worked for a while but certainly does not anymore. Debt buying has become a tougher business.
The question becomes: Who is in a good enough position to buy?
“Debt prices have gone down and are hovering in the downright totally reasonable range. But if somebody has blown their investor wad making bad decisions, they may be less able to take advantage of the opportunities that the market is presently offering,” says Louise Epstein, president at Charge-Off Clearinghouse, an Austin, Texas-based debt broker.
