Prices for bad-debt portfolios have gone up in recent weeks, with prices for fresh debt improving at a faster rate than older receivables, according to several industry insiders.
Fresh chargeoffs are selling in the upper end of the 3 cents to 8 cents on the dollar range. Older accounts, worked by more than one agency, are fetching anywhere from fractions of a cent to four cents on the dollar.
Aaron Hadam, executive vice president of debt broker National Loan Exchange Inc. in Carlsbad, Calif., says the upward shift for fresh chargeoffs has not necessarily convinced issuers to sell more.
What's more, the traditional year-end inventory sell-off failed to materialize in December. “Everyone expected a large boom and that didn’t happen,” says Robert Morris, founder of debt buyer Oliphant Financial Corp. in Sarasota, Fla.
Some insiders question if the higher prices are 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, says Stacey Schacter, chief executive and president at Vion Receivable Investments in Atlanta.
Liquidity is unlikely to improve anytime soon, he adds. Unemployment rates are high and employers are not doling out raises, so consumers still have less ability to pay debts. Several states also are making it harder for debt buyers to sue, which further drops liquidity.
Joel Le Blanc, senior receivables management consultant at debt buyer Square Two Financial (formerly Collect America) in Lenexa, Kan., says 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, adds Morris. If they don't 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 cents to 8 cents spectrum, says LeBlanc.
Schacter, however, believes that prices ultimately either will stabilize or fall again because of bad liquidity, even if they do continue to rise in the short term.
Adds Louis DiPalma, managing partner at Garnet Capital Advisors in Harrison, N.Y., pricing is a statement of future cash flow, and anything that decreases cash flow decreases prices.
