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

Supply increases, demand decreases, prices drop.

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.