With the law of supply and demand at work - more buyers chasing fewer deals - debt buyers continue to see portfolio prices remain stubbornly high, regardless of the age of the debt.
The freshest charged-off credit card debt is fetching double-digit prices, in some cases as high as 12 cents on the dollar. Secondary and tertiary debt is commanding prices of 5 cents to 6 cents, up from 3 cents just a year ago.
“Prices have steadily risen the past six months across the board and there are more investors coming into the market, which shortens supply,” says Stacey J. Schacter, president at debt buyer Vion Receivable Investments in Atlanta. “Banks continue to tighten credit standards, so that further limits the supply of portfolios available for a larger pool of buyers. Under these conditions prices are going to remain high.”
With lenders tightening credit standards last year, some credit card issuers lowered credit limits as a way to hedge their risk against higher charge-offs in the wake of the unemployment rate exceeding 9%. That trend contributed to the lower supply.
“Unemployment has been a factor in supply because lenders are scaling back new accounts, but then there have been a lot factors coming into play when it comes to supply and prices,” says Aaron Hadam, a vice president at debt sales broker National Loan Exchange Inc.
Little price relief is expected anytime soon as the number of portfolios coming to market early in the year is traditionally lower than the final quarter of the prior year.
“There is always a lull in the first couple months of the new year because of the flurry of deals towards to the end of the prior year,” says Lou Dipalma, a partner at debt sales broker Garnet Capital Advisors. “Activity will pick up as the year moves along, but to this point no one has really started selling yet.”
When sales activity does increase, debt buyers expect the number of portfolios for sale to be about the same as in 2010.
“Most of the portfolios from 2007 and 2008, when there was a lot of placement, are gone,” says Al Brothers, CEO at debt buyer Cavalry Portfolio Services in Phoenix. “Credit is tight and that means fewer new portfolios will be available.”
Most debt buyers expect prices to stabilize in the double digit range by mid-year. Lower prices exist, but mostly only for portfolios that have been heavily worked by lenders.
“The more extensively the portfolio has been worked, the bigger the spread on price,” says Melody Cuff, senior vice president at debt buyer Oliphant Financial Corp. in Sarasota. Cuff says prices are up about 10% overall from the fourth quarter of 2010.
The bearishness debt buyers are feeling about prices and supply is being driven in part by an increase of funding for buyers.
“Buyers have raised a lot of capital and some companies that weren’t as active buying a year ago are stepping up their activity, so there is more competition for sales,” says Dipalma.
One bright spot is that the economy showed signs of improving in late 2010, which is giving debt buyers reason for hope that lenders will loosen credit standards in 2001.
“As the economy stabilizes, we are seeing some lenders loosen credit standards and that will get consumers using their credit cards more,” says Tim Kirkpatrick, president at debt broker LoanTrade Inc. “The more consumers use credit, the better the likelihood chargeoffs will increase.”
For now, debt buyers seeking bargains have no choice but to tread lightly and wait out the bear market.
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