Thoughts from the DBA: The Game Plan is Changing

The theme for this year’s DBA International conference was the "World Championship of Debt Buying" and the agenda was full of great baseball analogies. As for me, I missed the conference for the first time this year. I was on the "Disabled List" with a bad back and ended up spending the time in my office with a heating pad.

Luckily, several directors of our advisory team were at the show to pinch hit for me. Which is good, because all kidding aside, it is a very pivotal year for the industry. I asked Paul Legrady to share his observations from the event:

"The Debt Buyers Association returned to Las Vegas again this year, albeit as a different industry. Debt buyers, contingency agencies, vendors, and credit issuers all seemed to agree that the frothy debt buying market of past years had given way to a more moderate environment for buying and selling debt. This recent change in the market is affecting companies throughout our industry.

"First and foremost, credit issuers are selling more debt and receiving lower prices for these portfolios. We heard of pricing degradation of 20 to 40 percent year over year, depending on the type of portfolio being sold, from a number of credit issuers. While prices were at historical highs in 2006 and early 2007, these recent pricing changes are remarkable — a sign of a restraint in bidding on the part of buyers, and of fewer expected recoveries based on changing economic conditions.

"We heard that pricing reductions in the secondary market are even greater. Of course, when debt buyers are unable to "buy and flip" portfolios, the prices they can pay for original debt purchases must decline. With a few exceptions, we see this ripple effect taking place throughout the market, and many companies are seeing their revenues and profits decline as a result.

"As the debt buying market changes, cash is king. Debt buyers that can take down portfolios can find bargains at today’s prices. If these companies bid intelligently on these portfolios and utilize a tested liquidation strategy, these companies will turn a profit over time, as successful debt buyers have done since Bud Reitzel began buying loans from small banks in Michigan in the 1960′s.

"The heady days of 3 times purchase price in 3 years are past. The rising tide in this market is no longer lifting all boats. More moderate days of 20 percent internal rates of return (IRR) are here, at least for the foreseeable future. Profits in this market will, more and more, be reserved for the smart."

Did you come to the same conclusions as Paul? What was your take-away from the conference? Was Johnny Bench entertaining? Do tell!