Pricing in the U.S. Credit Card Market

A number of factors have caused the prices of U.S. credit card portfolios to increase dramatically in recent years. New investors such as hedge funds and private equity funds have backed debt buying companies, increasing demand for debt portfolios made available for sale. Publicly traded companies such as Sallie Mae and West have moved into the market through acquisitions of successful debt buyers, and subsequently brought their considerable financial resources to bear on the market. Debt buyers active in the market for a number of years have built on successful investments by reinvesting returns back into the market. The resale market has also diversified competition in the debt buying market, allowing contingency collection agencies and collection law firms to make purchases for the first time, drawing on their existing resources in the accounts receivable management industry. All of these trends increased the number and size of competitors in the debt buying market, exerting upward pressure on prices throughout market. This has taken place to such an extent that some debt buyers now recall the end of the 1990′s, when high portfolio prices led to a broad shakeout of the debt buying market.

Rapid Price Increases Experienced throughout Debt Buying Market
While all prominent debt buyers describe broad increases in the prices of debt portfolios, it is difficult to measure exactly how much these prices have increased throughout the debt buying market, for the same reason that it is difficult to put exact figures on the volume of debt exchanged in this market. However, prominent debt buyers report price increases of between 25 and 100% in the debt buying market over the two years between 2003 and 2005.

According to Deb Everly of Asset Acceptance, "I’ve heard from a lot of people over the last year and a half that prices have been up around 30 percent."

Scott Matte of RJM Acquisitions notes that prices have increased along with the increases in volume that took place toward the end of 2005. According to Matte, "We’re right in the midst of this end-of-year overabundance with portfolios (December 2005), but pricing still seems to be very, very high. I’d say prices were up anywhere between 10% and 25% in 2005. Since the beginning of 2004, you’re talking about a 25% to 40% increase in the price of paper."

Tom Ferris of The Sagres Company suggests that prices have increased more rapidly on some portfolios. Ferris notes, "The prices that we’ve been paying in 2005 have doubled since 2003."

These pricing increases led to some uncommon buying situations throughout the debt buying market at the end of 2005. According to Chic Natkins of Oliphant Financial, "I know of one major, major huge buyer that walked away from a forward flow contract, saying they bought all they needed for the year. This tells you that they were overpaying for the delinquent debt. If the delinquent paper was performing to expectations, the debt buyer would find a way to continue the forward flow and continue to collect upon it or it would purchase the debt in order to resell it at a slight profit. Obviously the resale idea would not fly since the original purchase price did not support the expected rate of return on the portfolio. So due to an inflated bid, the debt buyer incurred the wrath of the credit grantor by actually canceling a forward flow contract, claiming it purchased all it was obligated to purchase under the contract!"

Some Suggest that Prices are Peaking
Observations such as these have led some to suggest that the prices for delinquent credit card debt have started to peak.

According to some debt buyers, the presence of inexperienced buyers in the market over the past few years has contributed to these dynamics, particularly when these new buyers have been unable to create successful returns on their investment in purchased portfolios.

According to Steve Fredrickson of Portfolio Recovery Associates, "This is an inefficient market, and there are people in it that don’t have a clue what they’re buying. Variability of price can be irrespective of ultimate collection quality. Recently we think that prices across the board seem to be leveling out. Although there are instances of prices on particular pools continuing to go up and some going down, we’d characterize prices now as fairly stable overall."

The recently enacted bankruptcy reform legislation is also expected to cause some downward pressure on the prices of debt portfolios.

Scott Matte of RJM Acquisitions notes, "If you asked me this question at the end of last year, I would have said the market had topped out. Now I’m hopeful that at this moment in time, bankruptcy reform will cause an oversupply that forces prices to level off or come down in 2006. We’ll see."

Debt buyers also report more restraint in the competitive bidding process for debt portfolios. According to Gobind Sahney of Sahney & Company, "Pricing in itself is somewhat subjective at this moment. I think we’ve seen a top in some categories of debt, situations where people have walked away instead of continue to bid. In the more common category of paper, we’ve seen a topping effect. That doesn’t mean you don’t see an occasional exuberant buyer."

In fact, many prominent market participants have already started to witness a downward movement in the prices of credit card portfolios.

Danny Frank of West Asset Management commented, "Pricing is one of the biggest factors hitting our industry in this year, but I think there will be more calm going forward. We are already starting to see some segments of the market stabilize with regards to pricing and even price decreases in a few markets."

Decreasing prices, of course, help debt buyers source portfolios. Perhaps more importantly, lower prices help debt buyers meet expected returns, since collecting 2.5X the purchase price of an inexpensive portfolio can be much more manageable than collecting 2.5X the purchase price of an expensive portfolio.

This article was excerpted from Kaulkin Ginsberg Company’s research report, "Global Debt Buying Report: Experts Analyze the Worldwide Debt Buying Market." For more information on the report, please visit http://www.kaulkin.com/research/publications/dp/.

As Director of Research Services for Kaulkin Ginsberg Company, Paul oversees custom research projects and publications focusing on the accounts receivable management industry. Previously, Paul served as Research Manager of Thomson Financial, a leading provider of market information to the worldwide financial services industry, and as Research Manager of Term Sheet Intelligence, a provider of market research about venture capital transactions.

Paul has also served on the investment team of the venture capital firm New Vantage Group, where he reviewed business plans, interviewed business managers and performed due diligence on companies raising capital. He received his MBA from Georgetown University and an undergraduate degree from The College of William & Mary.