"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."There are certain things you need for automobile paper, for example, and if you can't get those documents then you shouldn't be buying that paper," [Gary Wood] said. "You have to know your requirements and negotiate your purchase contracts in a way that allows you to return accounts back that don't meet those requirements.""To be confident in today's market, you have to have capital and you need expectations for that capital," Wood said. "The companies that have the patience to sit through this rough spot we're in will have success in the future."
18 I November 2008 Collector he current economic downturn Varrichio said. “Projections were based prices that should become more has affected the financial world in on the market remaining relatively collectible at some point in the future.” ways never before experienced, stable. There were times in 2006 and This has had an adverse effect on the and the asset buying industry is no 2007 when many debt buyers believed resale market. According to Wood, as exception. Predicting how the industry that high prices were a permanent shift prices have fallen, the prices resellers will respond to the trouble and and not a temporary bubble. have been able to demand have also determining the next best move for debt “Buyers making bids in the current come down. buyers has many industry veterans environment will have to adjust their “The drops in both places have been puzzled. models to match the current economic similar, but it has affected companies conditions with possible continued hoping the margin would be higher,” THE FACTS liquidation degradation rather than Wood said. With collection liquidation rates basing it on historical models.” Similarly, buyers currently locked dropping considerably in the past year Buyers should work under the into forward-flow agreements will have and portfolio prices experiencing a assumption that conditions may not to continue paying the prices they dramatic dip as a result, debt buyers improve any time soon and alter their initially negotiated, which might be have been forced to reexamine their models accordingly. higher than the current market price. projection models when purchasing “We have adjusted our models to delinquent debt. expect liquidations to continue to slide ARE PRICES WHERE THEY SHOULD BE? Mike Varrichio, president of Global until we see some light at the end of the Some industry professionals believe Acceptance Credit Company, a tunnel,” Varrichio said. “We are prices are in line with market distressed consumer debt buyer based in predicting a worsening scenario.” conditions, while others think we Arlington, Texas, said most debt buyers Funding portfolio purchases has also haven’t seen the bottom yet. One thing are experiencing margin squeezes become increasingly difficult due to the everyone can agree on is that prices
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