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Bad debt is selling for a fraction of what it cost less than two years ago. Despite the low price tag, potential buyers are still balking because of the poor economy, which has led to lower collection liquidation rates.
Industry experts say fresh credit card charge-offs, when at their highest, were selling for as much as 14 cents on the dollar in early 2008 and have been steadily declining. Fresh credit card debt currently sells for 4 cents to 7 cents.
"Going back to early 2008, prices have been steadily declining. What we have seen is 50% to 60% price declines off their all-time highs, which were probably in late '07, early '08," Mike Varrichio, president at Global Acceptance Credit Co., tells Collections & Credit Risk. "The larger percentage declines have taken place in the past six months or so as the economy has continued to struggle."
Despite the sizable decline in debt pricing, Al Zezulinski, executive vice president at NCO Group Inc., says there still appears to be a gap between what buyers and sellers believe debt portfolios are worth.
"A lot fewer deals are coming to the market. Pricing expectations on the part of the buyer are not matched by the pricing expectations of the seller," he says. "The gap in some cases is so large that it's hard to bridge it."
NCO Group, located in Horsham, Pa., is the nation's largest accounts receivable management company based on revenue figures, according to research by Collections & Credit Risk.
Lou DiPalma, managing partner with Harrison, N.Y.-based Garnet Capital Advisors, points out that buyers are now losing money on much of the debt that was purchased at 14 cents because of higher unemployment and consumers' inability to tap the equity in their homes to pay off their obligations.
But the economy is cyclical, the consumer will recover and any of this debt that is purchased today has a long life giving buyers enough time to monetize the asset, DiPalma adds. "If you look at it as a long-term asset, it's a good time to buy."
The long shelf life of the debt is why some sellers are holding onto their portfolios. DiPalma says the industry's larger sellers are sophisticated, taking into consideration pricing versus liquidation. As a result, sales volume is down.
"[Sales volume] hasn't gone down to zero because they still need to manager their inventory," DiPalma says. "But collection agencies are pretty busy. There is no lack of delinquent paper."
For updates on this topic, please see CCR Newsline and upcoming issues of Collections & Credit Risk.
