4.9.2008 / Michael Flock
Credit Crunch: Good News or Bad?

RECENTLY, Flock Advisors spent several days in New York holding meetings with lenders and investors. Walking past the Bear Stearns building through the pouring rain, we couldn’t help but contemplate the effects of the credit crunch on the collections and debt buying industries. In the final analysis, we wondered, would the contraction of credit and the economic slowdown be good news or bad news for an industry already weakened by historically high prices?

Assuming that the slowdown and the current contraction is not deep and prolonged, Flock Advisors believes the current economic storms are good for the industry and will reignite industry growth, particularly in the world of debt buying, which has been frustratingly stagnant during the last few years due to stratospheric prices.

FIRST, THE BAD NEWS: A few large banks like Merrill and CIT are no longer financing consumer debt portfolios. Every lender we spoke with has become more cautious in the current environment. Some have decreased advance rates. Some have increased coupon rates. More want participation in the residuals.

NOW THE GOOD NEWS: All the lenders we know are very bullish about the future of the debt buying market. They all see prices falling 10% to 20% (or even more) to more conservative levels. Although liquidity is falling too, its decline is generally perceived to be slower than the price declines, thereby improving returns.

AN INDUSTRY LEADER COMMENTS: Former President of OSI Portfolio Services and current Principal at Briannaco Investments Stacey Schacter told Flock Advisors: “This is the time industry veterans have been waiting for. Those who have been patient with their capital will be rewarded with the ability to pick up a variety of assets at relatively good prices amid decreased competition. The type of shock that occurs during a recession or market turmoil is generally good for the industry unless the recessionary period is too long or unusually deep. At this point, while I don't see a quick recovery in the economy, prices should remain within a more sensible band, leading to increased profits.”

THE BOTTOM LINE: We believe that as long as there are no major bank failures or additional credit tightening, 2008 has makings of a good year for debt buyers. The convergence of price declines and flexible financing with a wider range of offerings spells opportunity and growth.

CAPITALIZE YOUR UNIQUE POSITION NOW: Timing has never been more important. If you want to leverage your debt buying investments, start shopping ... and have fun negotiating!