A Trying Time for Debt Buyers, But Opportunity Exists

The debt purchasing market is receiving a harsh blow from the recession. On a recent Kaulkin Ginsberg conference call, The State of the Industry: Trends from 2008 and Predictions for 2009, experts noted a number of trends in debt purchasing.

The dreary consumer economic environment has significantly slowed collection rates, causing downward pressure on portfolio prices. At the same time, the ongoing credit crunch has eaten into some buyers’ access to funds to complete purchases, putting even more pressure on debt prices.

While most debt buyers still have to contend with lower collection rates on portfolios that were bought when prices were soaring, the low cost purchasing environment is creating opportunities for those with access to capital.

Debt buyers are now looking at higher quality debt portfolios.

In one example, Encore Capital Group’s (Nasdaq: ECPG) purchase prices for debt portfolios rose in the third quarter of 2008 to $66.1 million from $52.5 million in Q2 2008 because of the cost of higher quality portfolios.

But banks and issuers are fighting the trend of lower prices on their best bad accounts. Many have turned to collection agencies to help out.

“Collection agency outsourcing in the bank card/credit card sector is the focus of credit card issuers in the marketplace today as a result of challenges in achieving what they consider to be appropriate debt portfolio pricing in the marketplace,” said Mark Russell, director at Kaulkin Ginsberg.

Some credit issuers think that the current tax return season is going to come with more debtors paying their debts. But Russell thinks the season is not going to make much of a difference because debtors have more to worry about than paying off old credit cards.

“Consumers, when they get their tax returns, are not going to be willing to use as much of it to pay down debt. They’re going to be concerned about what the future holds for themselves, not as debtors but as employees,” he said.

This will force credit issuers to sell their portfolios next quarter, which could possibly end the portfolio price standoff between credit issuers and debt buyers.

Kaulkin Associate Michael Lamm explained that the debt buying market has hit a wall, with large accumulations of less collectable debt portfolios. The backlog, and the pricing battle between banks and buyers, has greatly reduced demand for portfolio purchasing.

A glance at the SEC filings of some of the publicly traded debt buyers seems to support this notion.

Portfolio Recovery Associates (Nasdaq: PRAA) bought debt portfolios with a face value of $857.2 million through the third quarter of 2008. In 2007, PRA purchased portfolios aggregate face value of $2.61 billion. Similarly, Asset Acceptance Capital Corp. (Nasdaq: AACC) had purchased $500 million less in face value portfolios through the end of the third quarter of last year, when compared to the same period in 2007.

Editor’s Note: Kaulkin Ginsberg, a strategic consultant to the ARM industry, is the parent company of insideARM.com.