ARTICLE...
The Future of Debt Sale
To get a glimpse at what the future holds, we asked Leigh Berkley – Chair of the DBSG and Chief Executive of Tessera – his thoughts on what he thought would happen within the Debt Sale industry...
Overall, capital is becoming less constricted following the price reductions last year. Some buyers have successfully renegotiated facilities, and some new players are now looking for opportunities.
Meanwhile, a few buyers are "regrouping" to build efficiency and compliance after a period of rapid growth, putting them out of the market for most new deals.
Where funding was already in place, expected rates of return are now getting back to levels where the funder would not expect low-risk bargains. However, capital costs remain at least as high as before the crunch, despite lower base rates, and this may attract new funding over the next two to three years.
Some sellers have already made provisioning adjustments to allow them to sell at reduced prices, while others are doing this in quarterly steps. However, some regular sellers are finding that prices on better segments remain firm, even compared to the peak. One factor here is that some buyers will inevitably be suffering from a drought of purchases over the last 12 months, and need to buy to keep their operations afloat. This 'desperation' factor will probably abate within one or two years as buyers either manage to buy or are acquired, or in some cases go into run-off.
Short term lender strategies such as hoarding debt, employing more in-house resource or extending DCA placements will not be viable for more than a limited period, with senior management likely to require divestment of assets at the year end or shortly into 2010.
Elsewhere, compliance of buyers is finally becoming a significant issue to sellers, as 'reputational risk' and adverse media attention hit home at senior management level. I believe this trend will continue following the expected change of Government, as the Conservatives will form a Consumer Protection Agency. Compliance costs have increased considerably, and the CCA06 regime will affect seller and buyer margins for the foreseeable future.
Forward flows are unlikely to return to previous levels until the market stabilises. This will only occur once the recession bottoms out, at which point buyers may suddenly be more keen than sellers to enter into a forward flow. Both sellers and buyers may gain from accurately predicting the tipping point, but the certainty of forward flow for both parties means this structure will always be popular.
Apart from these challenges, propensity to pay within the population has started to decline. Unemployment is likely to reach 10% (3m) early next year, and although the recession may be nearing its end following the news that France, Germany and even Japan are recovering, the unemployment lag is likely to mean that 'can't pays' will rise over the next 18 months. 'Won't pays' will also continue to rise, with seemingly endless advice available on how to avoid their debts. The CCA06 statements and notices will provide new ammunition to the advice websites, and media attention is unlikely to turn positive, despite the best efforts of CSA and DBSG.
So, looking forward to the next two-three years, I feel that demand will be sufficient to meet supply throughout, buyer efficiencies will help to maintain prices, but overall propensity to pay will decline, so a return to 2007/8 prices is unlikely for some time. Pricing will be variable, with better quality portfolios in terms of payments and customer data/documentation attracting consistently high prices, but with more caveats from buyers relating to availability of original paperwork, timely submission of CCA06 statements etc. Creative structures such as vendor funding, place to sell, profit share and perhaps a return to a kind of progressive equitable assignment will all play their part in ensuring deals are done, so I believe debt sale will recover in 2010 to 2007 levels (approx £7.5bn) and continue to grow thereafter, subject always to the prevailing economic conditions.
