Debt Portfolio Pricing Down as much as 50%; Further Drops Forecasted

The price to purchase portfolios of charged-off credit card debt has dropped dramatically from Q1 ’07 to Q1 ’09.  Does that sentence seem overplayed to you? We’ve all been hearing it in the ARM industry ad nauseam. But few have been able to offer specific numbers on the trend of declining portfolio prices.

In Q1 ’09, prices for freshly charged-off credit card accounts dropped on average 50 percent from a year ago, reaching the point where they are now nearly aligning with liquidation rate declines.  Prices are down as much as 60 percent or more from the first quarter of 2007, to a range of $0.05 to $0.07 for fresh credit card paper.

A number of factors are leading to the sharp drop in prices. Principally, liquidation rates are down and buyers are simply not willing to pay as much for an asset that is underperforming. Liquidation rates have dropped on average 55 to 65 percent on fresh credit card debt since the first quarter of 2007.

Buyers are also continuing to find it tough to secure financing for portfolio purchases, and when they do, it is considerably more expensive. This has strained demand for debt portfolios at a time when supply is plentiful, further reducing prices.

Virtually all stages of delinquency have seen price declines in the debt buying market. Secondary and tertiary portfolios are down nearly 70 percent since the first quarter of 2007. Quads are now being sold at a range that dips below a penny.  And we believe this trend will continue in 2009 as a result of further liquidation declines driven by ongoing economic turbulence and higher unemployment rates.

The Advisory Team at Kaulkin Ginsberg, myself included, will be discussing these numbers in even greater detail tomorrow at 1pm Eastern in our executive conference call. We’ll be covering specific price ranges for credit card debt across delinquency stages, liquidation rates for ARM firms through the first quarter of this year, the reasons for declines in both, and what you can do to navigate this tricky environment.

You will also get an update on M&A activity in the ARM industry and a detailed look at the financial health of the U.S. consumer. To learn more about the call — or to register — please visit http://www.insidearm.com/go/executive-conference-calls/arm-industry-update.