Getting Current on Pricing in the U.S. Credit Card Debt Purchasing Market

It goes without saying that we have seen quite a reduction in pricing of credit card portfolios in the primary market (those sold by credit card issuers to debt buyers) over the past year. And while these price reductions have been well received by the debt purchasing industry, many debt buyers believe that they have not dropped far enough, particularly when compared to the decline in liquidation rate performance over the past year.  

Kaulkin Ginsberg has been tracking the change in portfolio prices by stage of delinquency over the past year, and has projected where prices will be heading in 2009 as a result of the disparity between the price and liquidation rate declines. The price ranges are based on confirmed transactions as well as anecdotal discussions with debt buyers and credit issuers. The liquidation rate decline ranges have been gathered from collection agencies, law firms, debt buyers and credit issuers:

While both debt buyers and credit card issuers are firmly aware of the drop in portfolio liquidation performance over the past year, current portfolio price ranges do not fully reflect these declines because debt buyers in some cases are prepared to pay higher prices for certain portfolios, and credit issuers in some cases are not willing to accept the reduced pricing levels.

Every debt buyer assesses the value of a specific portfolio utilizing a unique set of financial assumptions that reflect their liquidation strategy, expected rate of return and the potential risk associated with achieving the desired liquidation performance. These variances in assumptions result in different values – or bids – placed on a specific portfolio. In a stable or growing market, this environment bodes well for sellers who participate in public auctions because they tend to maximize value through a competitive bidding process. However, in a recessionary market, debt buyers tend to use more conservative assumptions in their liquidation calculations.  In other words, they expect a decline in liquidation performance, which produces lower bids. As a result, certain portfolios generate bids that fall short of the seller’s minimum price requirement to consummate a deal, resulting in what’s termed a “no-trade.”

We have seen a substantial increase in no-trades since Q3 of last year and we expect this trend to continue at least until the end of the first half of 2009. Credit issuers are prepared to accept a no-trade result as opposed to selling a portfolio below their minimum price level because they have the option to outsource their portfolios for collection instead of selling them. Since we are now in the tax return season, which typically produces the highest liquidation results for the year, the credit issuers are not feeling pressured to sell their portfolios at this time.

We believe this perspective will likely change in the second half of the year, once the benefits of the tax return season and federal government stimulus programs have been fully realized. In fact, we are already seeing signs that some credit issuers are starting to feel differently about selling as a result of the following trends:

• Disappointing liquidation rates
  Liquidation results during this tax return season have so far not lived up to expectations for some debt buyers and credit issuers, and may get worse as a result of higher unemployment rates and concerns over worsening economic conditions.

• Agency networks are becoming maxed out
  The larger credit card issuers are continuing to experience rising volumes of delinquent and charged-off credit card debt, which they need to outsource to first and third party receivables management companies, service internally, or sell. While there has been a large push toward outsourcing and servicing internally, these resources are finite and may not be able to expand quickly enough to support the increasing volumes.

• The economy is not yet rebounding
  The recessionary economic conditions are not yet improving, and there are no signs of positive affects on liquidation performance from the federal government’s stimulus plans.

Some of these credit issuers are selling portions of their portfolios in order to maintain an established network of debt buyers and to hedge against the possibility of future price declines. While most of these transactions are still occurring via public auctions, some are happening confidentially between sellers and buyers. We are also starting to see sellers and buyers negotiating structured deals in order to bridge the gap between their respective value expectations. In these structured deals, debt buyers and sellers are confidentially discussing their respective viewpoints on the future liquidation performance of the portfolio, coming up with a mutually agreed upon cash value and allowing for additional future payments to the seller in the event that certain liquidation thresholds are achieved. While these structured deals are not that common today we see the potential of a growing trend, particularly if the economic conditions worsen over the next several months.

While no one has the perfect crystal ball, based on current economic and market trends we believe that debt sales activity will increase in the second half of the year and most of the transactions will be consummated at the projected 2009 price levels – particularly if the liquidation rates remain at their current levels and/or get worse over the next few months. We also believe that these projected price ranges will remain in place until the economy stabilizes and the credit card issuers see a decline in their charged off credit card volumes.

Mark Russell is a Director within Kaulkin Ginsberg’s strategic advisory team. He will be hosting a live Executive Conference Call on market conditions and their impact on liquidation performance and pricing as well as merger and acquisition activity on April 2nd. For more information, visit http://www.insidearm.com/go/executive-conference-calls. 

To confidentially discuss your business interests, please contact Mark at 240-499-3804, or by email.