Debt Buyers Discuss Falling Portfolio Prices and Funding at Forum

Debt portfolio prices have fallen anywhere from 10 to 50 percent, debt buyers told insideARM at last week’s ACA Fall Forum in Chicago.

The actual percentage depends largely on knowing the portfolio one is buying, said Stuart Blatt, partner with Margolis, Pritzker, Epstein & Blatt, Townson, Md. “The rates run between 5 percent and 10 percent on good portfolios and 40 to 50 percent on bad ones.”

Portfolio prices had been artificially high before the recent slide started, Blatt added. If a debt buyer paid too high a price initially, the pricing fall-off was sharper than if he had paid a lower price. Additionally, debt buyers must closely examine their purchases to ensure that they will perform as the seller said. With the recent downturn in the economy, it’s a good time for debt buyers to re-examine their portfolios, Blatt said.

It’s also a good time to be a buyer, Blatt added. In the past, creditors had sold their worst portfolios first. Now creditors are so cash strapped that they are selling many more prime portfolios, which will be much better performing than the secondary and tertiary portfolios banks were offering up before, Blatt said.

Another factor is the mix of accounts in the portfolios, said D. Ryan Campbell of The Sagres Company in San Diego. While credit card portfolio prices might be down 30 percent, auto-related debt is down much further. Recovery rates on those portfolios are down anywhere from 10 percent to 50 percent.

“Newer paper is performing much better than older paper,” Campbell said. He recommended that debt buyers with a mix of older and newer debt concentrate on the former because the recovery rates will be much better.

An increase in prices and improvement in recovery rates aren’t likely until the economy improves, which isn’t likely until the second half of next year, Campbell added. “[The economic recovery] has become really tough to forecast.”

Another issue plaguing the debt buying industry is that the funding for purchases has largely dried up. Campbell said financing is very difficult to find right now.

Stewart W. Hayes, senior vice president at Wells Fargo Foothill Lender Finance, a provider of senior secured financing from $10 million to $1 billion and one of the speakers at the conference, concurred that lenders are taking a much more critical look at debt buyers and other prospective borrowers than they once did.

Hayes, and other panelists who discussed financing, agreed with the 10 to 50 percent figure for the decline in debt portfolio pricing. One telling factor, according to Christopher Runci, principal of the Runci Group, was that the original panel to discuss financing included five members besides himself, but market conditions had shrunk the panel size to two.

Hayes said debt buyers should focus their capital-seeking efforts differently, depending on their size. Those in the $100,000 to $1 million range should seek funds from peers, equity capital from friends, family and business associates and debt capital from local and regional banks. While national banks may at times offer capital to these smaller debt buyers, “local banks are much more likely to provide some types of credit,” Hayes said.

Those firms in the $1 million to $10 million range should seek debt capital from local, regional or national banks or hedge funds, Hayes said.

For those over the $10 million threshold, Hayes said that Wells looks for an experienced management team, stable track record, consistent monthly acquisition volume, institutional platform and reporting, defined recovery strategy and an ability to contribute equity.

“We want to make sure that they have some skin in the game,” Hayes said.

Lenders are also looking to tie amortization of loans to actual collection history, particularly now that actual collections are usually falling short of previous collection history and predictions.

Any credit facility will have a maximum limit, with the advances tied to the acquisition prices of purchased asset pools. Hayes added that asset pools must conform to established eligibility criteria (e.g., pool size, asset type, purchase price vs. face value).

“Customary financial covenants will apply,” Hayes added.

Hayes recommended that debt buyers seeking funding should determine how much they need, where they would like to take their business, and the best type of funding to fulfill their needs (e.g., equity or debt).

“Look at loan terms and structure,” Hayes added. “The cheapest money may not always be the best money.”