Is the Loan Sale Party Over?

Happy New Year! As we clean up the confetti and look ahead to 2008, is the party over for credit issuers who are counting on high prices for their delinquent debt?

Jamie Welsh, our director of debt portfolio services, shares his perspective on the market:

“I think it’s safe to say that years of aggressive pricing of delinquent debt portfolios have finally caught up with us. We began seeing the effects within the secondary marketplace several months ago, but it is evident that this trend has made its way up the chain to the issuers themselves. Sellers have become very comfortable – even spoiled – by the sale prices and gross proceeds resulting from loan sale activity. Consequently, budgets and targets were set around the continued expectation of such high pricing. All of a sudden, sellers have met with resistance. Buyers are now aware of the effects high pricing has had on their internal rate of return (IRR). Many buyers can no longer justify – or even afford – spending so much for inventory. In addition, buyers in the secondary market, who bought when prices were high, are deciding to sell now at a reduced price in order to justify the returns they predicted at purchase. This has resulted in a tremendous amount of paper on the market in what is always a busy time of year – creating a very rapid shift in the balance of power from a sellers’ market to a buyers’ market.”

Jamie predicts the New Year will see:

• Pricing on a national level will continue to wane, but pricing on a regional, state and local level will flourish, enticing sellers to segment their portfolios to maximize yield.

• Issuers will feel the pressures from buyer demands around contract language, terms and provisions.

• Issuers will push for forward flow opportunities to mitigate dropping prices, but debt buyers will look to be active in a spot sale scenario.

• Issuers will strive to be more creative with their offerings as it relates to vintage, portfolio make-up and contract language.

What do you think? I’m a firm believer that lessons learned from the past can influence future behavior. Where do you think the debt sale market is heading?