Card Debt Prices Dropping as More Paper Hits Market

Call it the Wal-Mart effect. Prices go down and sales go up.

A decline in the price of credit card debt portfolios has been driving “a significant increase in sales volume” of the portfolios in the last two quarters, according to Mark Russell, director at ARM industry consultant Kaulkin Ginsberg.

Finding pricing information is more of an art than a science in the accounts receivables management industry as there is no central exchange for such sales, and buyers and sellers typically do not share the numbers. Further, there are so many variables to the type of debt trading hands—age, type, quality—that comparisons are difficult.

Still, a focus on the credit card market suggests that more debt has been coming to market in the last six months, and prices are dropping, according to Russell’s article “Getting Current on Pricing in the U.S. Credit Card Debt Purchasing Market,” in the March issue of Insight from Kaulkin Ginsberg.

Credit card debt generates about 80 percent of total debt purchasing activity, notes Russell, who manages merger and acquisition transactions for the consultant.

The price of fresh debt is selling in a range of 9 cents to 12 cents on the dollar, a decline of 10 percent to 30 percent in the last year. Fresh debt typically is debt that is 180 days old that has not been worked by a collector.

Primary debt, which has been worked by one agency, has recently sold in the range of 5 cents to 8 cents on the dollar of debt. That’s a decline of 20 percent to 33 percent from a year ago when it was selling in a range of 8 cents to 12 cents on the dollar, according to Russell’s research.

Secondary debt portfolios, made up of debt that has undergone two collection attempts, is now trading in the range of 3 cents to 5 cents, a decline of 25 percent to 40 percent from a year ago, Russell found.

The price decline has occurred as the slowing economy caused credit card charge offs to rise. That drove card issuers to sell more of their receivables as they see their cardholders go delinquent, according to Russell.

Meanwhile, debt purchasers are trying to resell some portfolios they’ve bought, adding further downward pressure to the market.

Indeed, James Sartain, president and CEO of debt purchaser FirstCity Financial, said in an investor conference call today that “these are the times we look for [as debt purchasers]." Sartain said that FirstCity was the high bidder in at least seven portfolio auctions in the fourth quarter of 2007 where the seller pulled out because it felt prices were too low ("FirstCity Reports Difficult Q4, but Rosy Outlook for Purchasing," March 17).

Russell predicts that prices for fresh and prime portfolios could decline another 5 percent to 10 percent this year, while secondary and later stage portfolios could decline another 10 percent to 20 percent.

Kaulkin Ginsberg is the parent company of Kaulkin Media, the publisher of insideARM.com.