Credit Card Debt Buying Market Showing Signs of Life

Mark Russell

Demand for credit card portfolios from credit issuers has picked up since the beginning of 2010 as a result of debt buyers seeing a decline in asset volumes under management and having a limited number of portfolio acquisition opportunities.

These market trends, combined with the improved liquidation performance that most acquirers experienced in 2010 as compared to 2009 (see my previous blog), has caused a dramatic increase in credit card portfolio pricing since the beginning of last year (see the tables below for more specific details).

Credit Card Portfolio Prices

In response, more debt buyers have entered the secondary debt buying market (seeking acquisitions from other debt buyers), which was virtually non-existent in 2009.

The pricing of portfolios in the secondary market is lower than the primary market (acquisitions from credit issuers), because the acquirers apply a heavier discount than what is shown above to reflect the liquidation performance of the current owner, and to take into account potential challenges such as obtaining the necessary documentation from the original credit issuer. Still, the secondary market poses an interesting growth opportunity for debt buyers who know what they are buying and who they are buying from.

With regard to the primary debt purchasing market, I am somewhat surprised that more credit card issuers have not yet begun to sell a greater portion of their available portfolios. As you can see in the table above, prices for fresh through tertiary paper pretty much reflect 2008 ranges. While some industry experts have prophesized prices for fresh paper getting to higher levels (as high as $.14 – $.15), I am not in their camp…yet, and hope for the sake of the industry that their predictions do not come true.

I do believe that the supply of portfolios available for sale should increase later this year because the pricing should be at, or slightly above, the hurdle rate set for the outsourcing strategy. It also doesn’t hurt that liquidation performance was flat to slightly down in the second quarter of 2011 compared to the same period in 2010.

However, I also strongly believe that debt buyers need to continue to be prudent with their pricing strategies and not just bid to win. Future trends associated with liquidation performance, regulatory changes, and purchasing opportunities remain too uncertain to risk a high bid for more business volume and/or a client relationship.

One strategy that some debt buyers have implemented to protect against declining business performance is developing a contingency collection/legal collection servicing capability, which is outsourced to other debt buyers, and in some instances to credit issuers. Some industry experts argue that this strategy can create a conflict in the minds of the clients: “Are you interested in acquiring or servicing my portfolio?” I, on the other hand, have not seen this conflict become a problem, because the ARM servicing company is typically a separate entity with a different marketing effort, and the debt buying company becomes just another client.

Some debt buyers have also diversified into other consumer markets – bankruptcy, personal loans, auto loans, student loans and HELOCS (home equity lines of credit) remain the favorites as these are typically sold by the same credit issuers that offer credit card portfolios. Healthcare has become a dirty word to most credit card debt buyers, but certain niche markets like probate, utilities, pay day loans, and technology/Internet (online vendors) are gaining attention.

Financing remains a challenge, particularly for newly formed debt buyers and small or mid-sized debt purchasing companies. Virtually all lenders require debt buyers to pay for a portion of every portfolio (typically 10% – 30% but it could go as high as 50%). For those debt buyers who don’t have the wherewithal to pay the 10% to 50% portion, we have seen a slight increase in interest from private equity firms and private investment groups, but you have to clearly define for them what their rate of return should be and how they will be able to liquidate their investment.

With regulatory, economic and market changes, the debt purchasing market should only become a more exciting roller coaster ride over the upcoming year, but companies that can continue to win deals and avoid betting the house should be able to survive and eventually thrive.

Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.