Tight supply has sent portfolio prices for the freshest chargeoffs soaring in recent weeks to as much as 12 cents on the dollar. Portfolio prices for these accounts are now averaging more than nine cents on the dollar, according to debt buyers.
In June, prices for new chargeoffs were running between five cents and seven cents on the dollar, up from a low of three cents at the start of the year, according to Collections & Credit Risk research.
Stacey Schacter, CEO of Vion Receivables investments, says Vion was recently out bid on a portfolio from a lender it had been buying from for nearly two years.
“We increased our price a lot and still lost,” says Schacter. “Since there is less supply, we are seeing some buyers willing to pay more for fresh chargeoffs to continue feeding their shops.”
As has been the case for months, availability of fresh portfolios has dwindled as lenders are holding on to recent chargeoffs longer. Earlier in the year lenders were holding back new paper and working it in-house or assigning it to agencies because prices were so low.
With prices rising and bidding wars ensuing more often, lenders and creditors are more inclined to wait for prices to hit the level they want before selling.
“A year ago it was the buyers who were sitting on the sidelines waiting for prices to drop further before they moved on a portfolio, now it’s the sellers that are waiting out the buyers,” says Joel LeBlanc, a regional sales manager for Atradius Credit Insurance Inc. “Citibank has delayed the sale of some portfolios for months in the hope they get a higher return.”
As part of his duties for Atradius, LeBlanc looks to partner debt buyers that do not have collection arms with licensed firms that can work the debt on their behalf.
Although prices are rising, there is still a wide variance in price based on the quality of the portfolio, type of debt, age and average balance. The spread on credit card chargeoffs, for instance, ranges from five cents to more than 10 cents on the dollar, according to Aaron Hadam, executive vice president for debt broker National Loan Exchange. “Prices remain very dynamic and product specific,” he says.
Looking ahead, sellers are not expected to begin reversing the trend of constricting supply, despite rising prices.
“As long as lenders are happy with the ROI they are getting through placing the debt with an agency, they will continue that practice,” says Al Brothers, CEO of Calvary Portfolio Services. “When the ROI from a sale exceeds the ROI from placement is when supply will start to increase.”
That day may not be far away. LeBlanc says prices are rising dramatically on all types of consumer debt, including medical debt.
“Prices may level out in the 14 cents to 15 cents range and that will loosen up supply somewhat, but at that price buyers need to rethink their rule of earning an ROI of 2.5 to 3 times the purchase price,” he says. “The economy remains weak and unemployment high so returns are diminishing as prices rise. At some point, buyers are going to have to diversify their portfolios or the higher prices they are bidding will come back to bite them.”