Q1 2009 Credit Card Sector Performance

Two weeks ago I discussed in detail the credit card sector’s liquidation performance and portfolio pricing ranges in the first quarter of 2009 during KGC’s Executive Conference Call.

In Q1 2009 the credit card sector experienced a liquidation decline between 25% and 50% compared with Q1 2008 results, with the earlier stage paper (fresh and prime) generating greater liquidation declines (30% to 50%) than later stage paper (tert and quads), and smaller balance accounts producing lower liquidation declines (15% to 25%) than larger balance accounts. Collection agencies and debt buyers confirmed that fresh portfolios experienced the largest declines in liquidation performance, and felt that this trend was occurring because credit issuers were generating better liquidation results at the pre charge-off stage due to better internal collection strategies and a higher level of first party outsourcing.

Debt portfolio prices also continued to drop as a result of the liquidation declines coupled with increases in unemployment and continued uncertainty surrounding the economy and market conditions. In Q1 2009, portfolio prices declined between 20% and 50% over the past year, with the most significant declines occurring at the fresh and prime stages of delinquency.

Debt buyers speculate that fresh portfolio liquidations dropped due to credit issuers improving their liquidation performance pre charge-off by outsourcing the portfolios to collection agencies on a first party basis and/or upgrading their internal collections operations. While the decreasing pricing trend has caused a reduction in debt purchasing activity, it has also led to a change in the debt purchasing process. Instead of portfolios typically trading via a public auction process, several credit issuers are focusing more on private transactions, and some are starting to consider structured deals with debt buyers whereby the buyer and seller agree to an upfront cash component along with a fee sharing arrangement based on future liquidation performance. I believe private transactions and structured deals will become more common in the debt purchasing sector throughout the rest of 2009.

I expect liquidation performance to continue to decline throughout ’09 as compared to ’08 due to ongoing increases in the unemployment rate and concerns regarding the economy, which will also continue to apply downward pressure on pricing with fresh portfolio prices most likely bottoming out in the $.04 to $.06 range.

How does this feedback compare to your performance in the credit card sector? Please let us know!