SURVEYING THE LAND
Collector, Nov 2008 by Remley, Rachel
THE SHAKY ECONOMY HAS ASSET BUYERS REEVALUATING THEIR PRACTICES.
The current economic downturn has affected the financial world in ways never before experienced, and the asset buying industry is no exception. Predicting how the industry will respond to the trouble and determining the next best move for debt buyers has many industry veterans puzzled.
THE FACTS
With collection liquidation rates dropping considerably in the past year and portfolio prices experiencing a dramatic dip as a result, debt buyers have been forced to reexamine their projection models when purchasing delinquent debt.
Mike Varrichio, president of Global Acceptance Credit Company, a distressed consumer debt buyer based in Arlington, Texas, said most debt buyers are experiencing margin squeezes thanks to the downturn.
“Although prices for distressed debt have moved lower this year, so have liquidation rates,” he said. “For those debt buyers who paid relatively high prices for portfolios between 2005 and 2007 and are experiencing lower liquidation rates, margins are being squeezed and impairment charges are being taken.” An impairment charge is an expense publicly traded debt buyers incur when a portfolio doesn’t live up to initial projection expectations.
Because most debt buyers base their initial projections on historical data and market conditions at the time of purchase, their projections for portfolios purchased between 2005 and 2007, when prices were relatively high, were projected to produce recoveries more in line with the prices they paid. However, when liquidations began to drop at the end of 2007, buyers began to experience tighter margins.
“Fighting your way through the current economic climate has become very difficult for debt buyers because the downturn was unexpected at the time the packages were purchased,” Varrichio said. “Projections were based on the market remaining relatively stable. There were times in 2006 and 2007 when many debt buyers believed that high prices were a permanent shift and not a temporary bubble
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