Creativity in debt sales
Published Thursday 16 July 2009
The idea of ‘creativity' within the debt sale industry was traditionally not one that necessarily sat comfortably with some of the major buyers. As one buyer once said to me "creativity is the process by which the description or segmentation of the debt is changed to confuse the unwary !". But times have changed.Twelve months ago the market was very different than it is today: funds were readily available to buy large portfolios. The appetite among buyers and sellers alike to do business was voracious: there was heavy demand, and the prices that sellers demanded, and secured were high.
Today the landscape has changed considerably. Fears of the recession loom large ;funding is now a major issue for many buyers; collection performance is falling; settlement rates have reduced; and the lending and the housing markets have cooled to the point of near freezing. What this means, however, is that the requirement for buyers and sellers to become more ‘creative' has become an imperative. It is no longer a case of just seeking competitive advantage; it is now essential for survival.
Accelerating this ‘creativity' is the increased level of sophistication amongst the mainstream buyers. Some, like The Lewis Group, have been active in this market for more than 10 years, and a decade of experience means having a better idea of what a debt is ‘worth', what constitutes a fair price and how value is affected by the changing characteristics of a portfolio. They also understand its worth in the market. However at the moment caution seems to be every buyer's watchword .In the words of another colleague in the industry "forward flow has a great future behind it" . No buyer wants to be saddled with an ongoing fixed-price commitment to buy accounts that may well be decreasing in quality and there is a growing realisation in the minds of the sellers that future forward flow deals will be very difficult to execute in the ‘traditional' way they have in the past
In terms of the trends we are seeing now, the most evident is the selling of paying accounts, a tactic that is less risky for the buyer. ‘Creativity' has emerged in the form of profit shares with the seller, and sellers being much more amenable to contractual condition changes, particularly in forward flow agreements (for example maximum balance criteria, debt age restrictions, and phased payments).
Inevitably there will be more creativity in the future. There will need to be more flexibility from sellers, especially in relation to price and the contractual period. The right of the buyer to carry out ao secondary sale, which until two years ago was still considered ‘unusual' will steadily become the norm, and more widely accepted. And there will be increased segmentation by sellers in the search for a debt portfolio that will realise its book value.