Asta Acquisition May Signal Trend in the Debt Purchasing Industry

When looking for signals and trends in a particular industry, it is often wise to pay close attention to the actions of high-profile companies in that industry.

In the world of debt purchasing, Asta Funding, Inc. (NASDAQ: ASFI) boasts one of the highest profiles around. So it would be prudent for industry observers to take notes when Asta speaks.

Yesterday?s announced acquisition of Denver-based consumer debt buyer Option Card LLC by Asta may seem like a relatively normal purchase of a smaller player by a big fish in the pond of debt portfolio sales. But Asta?s own words tell a much more intriguing story. Asta?s CEO, Gary Stern, remarked in the announcement, ?We are very excited with the purchase of Option Card, LLC. We view the acquisition as a $197 million portfolio purchase of consumer receivables at an attractive price with synergistic benefits to our existing business.?

With the total purchase price of Option Card coming in at around $13.5 million and taking into consideration Stern?s remarks, it appears that Asta acquired a $197 million portfolio for about 6.85% of face value. While this amount is much higher than what Asta is used to paying for distressed debt portfolios, there were several motivating factors that caused the company to pull the trigger, including Option Card?s attractive portfolio and relationships with financial institutions, and the opportunity for Asta to obtain a facility in Denver, Colorado with a legal network and computer technology that will enhance its existing infrastructure.

During Asta?s conference call regarding this acquisition, Gary Stern and Mitchell Cohen confirmed that while all of these factors contributed to their purchase price decision, the main determinant was the portfolio. According to Gary Stern, ?We valued the portfolio as primary paper, and our purchase price is in line with current market prices. The main difference is that we acquired a portfolio that is already generating positive cash flow, we aren?t starting from $0.?

Most importantly, perhaps, is the agreement that Asta acquired in the deal with a major financial institution. From the acquisition announcement, ?the acquisition brings the Company the right to purchase a small monthly forward flow of high quality distressed consumer receivables with liquidation rates in line with the Company’s typical portfolio buys, from a new relationship with a major financial institution.?

Asta cautioned in its most recent earnings release that the number of portfolios that met its criteria for purchase may decrease. This is a sentiment that has been echoed in the debt purchasing community for some time now. At the Debt Buyers? Association Conference in February, a speaker commented on high prices of portfolios possibly squeezing players out of bidding. Mark Russell, Senior Associate at Kaulkin Ginsberg Company, noted, ?There are too many buyers chasing the same paper right now. This is causing prices to remain at all time highs and forcing many of the seasoned buyers to sit on the sidelines and wait for better deals.?

So Asta, facing high prices for portfolios that meet their purchase criteria, bought Option Card ? for a price mostly based on their debt portfolio. In addition to a good portfolio of debt at a decent price, Asta acquires an operation that is accretive to their current business. Russell thinks this transaction could mark the beginning of a trend.

?We have predicted that a consolidation would occur in the debt purchasing sector over the next 12 to 18 months. Larger purchasers will be targeting smaller players based on the strength of their portfolios, client relationships and sector expertise. If Asta?s deal is any indication, the valuations for debt buying firms may become more focused on portfolio evaluation and less on the results of operations,? said Russell.

As debt prices continue to rise in the marketplace, Russell believes that more of the larger players will have to get creative in acquiring new paper. Asta?s acquisition of Option Card is certainly creative, and may signal a new trend in how larger debt buyers seek to acquire attractive portfolios in a less competitive environment.