Debt Buyers Experiencing Bumpy Ride on Prices

Prices for fresh credit card portfolios peaked recently at 8 cents on the dollar, with some even a little higher, a far cry from the 3-3.5 cents on the dollar these same portfolios were commanding in March of 2009, according to debt buying insiders.

Prices for fresh debt in the credit card sector started to rise in the second half of last year, said Mark Russell, director at ARM advisory firm Kaulkin Ginsberg, citing increased demand and a return of some debt buyers to the market as the overall economy strengthened.

“Debt buyers were a little more comfortable about future liquidation performance,” Russell said. “That allowed them to pay higher prices.”

But while the prices have increased substantially for early stage portfolios, that hasn’t been the case for some later-stage portfolios as states shorten the durations for statute of limitations for debt collections, according to Russell.

Chris Runci, principal for the Runci Group, East Greenwich, RI, agreed and said that the statute of limitations rules have been an issue, particularly in North Carolina and New York City. But there is still strong demand for some later stage debt, particularly at the state level. “Some [portfolios] that we’ve sold at the state level have gone very quickly,” he noted.

Runci said that the “suit-worthiness” of the debt – now punctuated by solid supporting media being supplied with the portfolio – is another factor contributing to pricing.

Russell also noted that debt pricing is influenced by many factors. One thing that can impact price is the collection efforts of the debt seller, including the efforts and techniques used internally before selling the debt.

“A debt buyer will use many different metrics and assumptions to come up with the pricing,” Russell said.

As long as there aren’t any further economic shocks, Russell expects credit card portfolio prices to remain steady for the rest of the year. Among the shocks that Russell is wary of is an international crisis, like the European Union pulling back from its support of Greece; a sharp drop in consumer confidence; and an unexpected jump in unemployment rates. A sharp decrease in unemployment, on the other hand, could help pricing.

But a decline in unemployment would also need to be accompanied by an increase in disposable income, Russell said. If higher-paying jobs that were lost are supplanted by lower-paying ones, unemployment may go down, but so does the disposable income that could be used to pay off debt.

“We’ve seen improvement in pricing since the end of last year, and we will continue to see improvement as we see improvement in the rest of the economy,” said Aaron Hadam, executive vice president for National Loan Exchange, Edwardsville, Ill. He, too, pegged pricing improvements or declines from current levels to changes in unemployment.

Most of the pricing improvement to date has been with newer portfolios, Hadam added. “Pricing improvement for aged and non-core receivables has been on a more portfolio-specific level than across the board.”

Portfolios with low- and mid-sized balances tend to get the best pricing treatment, Hadam said. “Higher balances are still a challenge.”

Russell and Hadam said the size of credit card portfolios has been shrinking, a trend that is likely to continue as issuers tighten their requirements and legislation restricts some fees.

Though the pricing isn’t as strong, there’s also been some renewed interest in the auto and mortgage markets.

Hadam added that as pricing has picked up more small- and mid-sized buyers have entered the market, but no new large buyers have entered.