Debt resale necessary to keep market buoyant
Published Monday 02 January 2006
Opinon Piece
By David Berry, Managing Director of The Lewis Group
If sellers want to sustain current pricing levels, they are going to have to consider allowing buyers the option of reselling.
The Debt Sale and Purchasing sector has come a long way since the first tentative steps were taken just a few years ago. Then it was considered quite radical, and it was only the most forward-looking and the most innovative who were engaging with the process, and endorsing this process as an integral part of their credit management strategy. Now, however, in certain areas at least, it is virtually de rigeur, a fact evidenced by its continual growth, currently heading towards 50% year-on-year, and perhaps even higher.
One of the principal reasons for its success is that it is now a well proven, low risk strategy. Historically, it had a low profile, and that tended to inhibit growth. Now it is written about constantly in the pages of the credit management press, and bodies such as the Debt Buyers and Sellers Group (DBSG) have been active in raising awareness still further.
A further reason is that the issue of trust has been overcome. Clients were understandably hesitant about releasing potentially sensitive information, and concerned that selling their debts to a third party for collection might somehow damage their reputation, or at the very least they would lose control over the communication with 'their' customer.
Perhaps one of the biggest reasons for the rapid expansion of Debt Sale and Purchase is that the sellers are being greatly assisted by the favourable prices that some debts are now realising. If they want such prices to be maintained, however, then buyers are going to have to work much harder with the debt, and that means opening up the option of selling the debt on to a second purchaser (ie re-selling the debt).
Of course, some sellers would recoil in horror at the thought of a debt being sold on to yet another party. We have overcome the initial hurdle of trust, and have established that their reputations are not at stake in selling their debt to a specialist buyer. If that debt is then sold on again, to yet another third party (ie a sub contractor to the main contractor if you like), then the seller needs to be re-assured that the same levels of protection are in place, and that his reputation is still paramount. In some minds at least, we are now throwing yet another 'level' of potential concern into the mix, and they will need to be persuaded once again that this is a viable option, where they will not be in any way disadvantaged.
But perhaps not all sellers are balking at the idea. I have seen one contract, recently, from one of the major players where provision is made and specific clauses added to enable the purchaser to re-sell the debt if they wish. Of course it requires the buyer to obtain the express permission of the seller before doing so, but it also states that such permission should be not unreasonably be withheld.
The cost of portfolios is rising significantly. Whereas previously the actual outlay for a tranche of debt may have been low hundreds of thousands, now it is not untypically closer to a million. For many, the costs are simply too great, and smaller operators are unable to take part. Being allowed to re-sell the debt, however, would allow many more smaller operators to become involved. A bigger market, with more buyers is a positive outcome for the seller. It means the supply and demand curve moves distinctly in his favour. It also means further opportunity for the market to flourish.
Preventing this from happening are sellers' contracts that are currently too restrictive and too prohibitive. Should that continue, businesses will be forced simply to explore other avenues. The emergence of companies that are prepared to pay an upfront fee for the right to collect a debt over a given period as a way of getting around this current issue is a case in point.
But the sellers should have nothing to fear from re-selling and everything to gain. A different approach from a different name at a different time will get results. We have an obligation to work the debt responsibly, within the CSA guidelines, and we are still responsible for the consequences if the debt is sold on. That doesn't change.
What has to change, however, is the sellers' position. If they want to maintain the prices as they currently stand, then they have to give the buyers the opportunity of maximising the return on their debt. The price is only right - and sustainably right - if the buyer can get back more than he paid, but he must be free to explore innovative ways in which this can be achieved. To me that looks like a 'win win' situation all 'round.