The Debt Sales Market is Turning Again
The balance of power in the debt sales market has unquestionably shifted in the current recession from sellers to buyers. This is widely discussed. In 2008, this market has experienced:
- Higher chargeoff rates for sellers
- Stressed capacities in the contingency networks of sellers
- Higher costs of capital for buyers
- Decisions on the part of buyers to sit out sales or exit the market entirely
Of course the debt buying market is cyclical, and based on several conversations with credit issuers, we see an end to the current cycle in sight, perhaps even closer than current economic conditions would suggest. The turn will be mainly caused by stricter underwriting standards on the part of credit issuing companies.
It is no surprise that through the second half of 2008, as the credit crunch has deepened, all issuers have made it more difficult for borrowers, especially those with lower credit ratings, to obtain credit.
Let’s walk this through the recovery cycle. Say stricter underwriting standards were instituted by credit issuers in the summer of 2008. Less consumer credit is extended through the fall of 2008. Some chargeoffs – importantly, fewer chargeoffs – take place 180 days later, say in the spring of 2009. Potentially, the U.S. economy resumes its growth towards the end of 2009 or early in 2010.
How does this affect our bullet points above?
- Lower chargeoff rates decrease the supply of debt portfolios made up of higher quality accounts
- Excess capacities of contingency networks decrease the supply of debt portfolios
- Lower costs of capital for portfolio purchases, based on more funding sources chasing better deals
- Decisions on the part of debt buyers to enter the market, chasing better deals with a line of sight to better liquidation rates
Supply decreases, demand increases, prices rise.
Stricter underwriting standards are already reshaping the debt sales market. All ofther things being equal, well-funded debt buyers should buy more now. All other things being equal, credit issuers should wait to sell more later.
As Director at Kaulkin Ginsberg, Paul provides management consulting services, helping clients improve accounts receivable management strategies and operations. Clients include lenders, A/R service providers, and industry investors. Contact Paul at 240-499-3818, or by email.
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Comments
Comment from debttrader on December 11, 2008 at 4:15PM EST
Why would creditors retain charge-off's or put off the recovery cycle during a period when their charge-off's are going through the roof? Only one point would support this idea and that is the current and near-term expectations of banks are very poor on wall street and in public opionion.
Furthermore, in your article you state recovery networks are overloaded with work currently. Why would banks take that risk versus cash now?
The smart buyers are waiting not only for year-end opportunities, but opportunities in Q1 of '09. Where creditors may hold December opportunities into Q1 to start off '09 in a better position versus the 2008 year.
This market is continually intersting. Lets see what happens.
Comment from John Rousseau on December 11, 2008 at 4:21PM EST
Credit Grantors need D.A.R.E.S.
Comment from J Pratt 89 on December 11, 2008 at 2:44AM EST
"Say" I tell you these assumptions of the current debt market were not based on fact or supportive data. How would that affect your bullet points?
There are too many assumptions made in this article. Show me facts. Show me numbers. Back up what you're supposing with data.
The industry doesn't need to be scared right now. Anyone actively participating in it is already uncertain enough. This industry needs to be educated.
Show me the data, please.
Comment from Anonymous on December 12, 2008 at 3:54PM EST
In basic economics supply decrease so demand increases. But the same stricter lending guidelines affecting consumer credit, strangle debt buyers' ability to finance purchases. As I see it, the basic economic model of supply and demand has nothing to do with the consumer debt marketplace we are in and will continue to be in for the foreseeable future.