News & Views 11: Apr 10

2009 was a record breaking year for charged-off credit card accounts. The banks wrote off $83.27 Billion in credit card debt last year, and since credit card debt is harder to acquire right now, we were wondering where it all went.

In February 2010, the FTC issued a list of the top 9 Debt Buyers in the country and stated that these firms bought 75% of the charged off debt in the country. That percentage did not seem plausible, so we started a little investigation of our own to see if we could locate last year's charged-off inventory. We looked at the amount of charged-off accounts that were purchased by these firms from information we could locate. We also looked at about 30 other of the largest debt buyers, so that we could get an indication of how much of this $83 Billion in charge-offs we could locate. Although the results are only estimates, they are very surprising.

Starting with the Nine Largest Debt Buyers

According to the FTC, the nine largest debt buyers are: Arrow Financial Services LLC, Asta Funding Inc., B-Line LLC, eCast Settlement Corp., Encore Capital Group Inc., NCO Portfolio Management Inc., Portfolio Recovery Associates, L.L.C., Sherman Financial Group LLC, and Cincinnati-based Unifund Corp. Of this list, three are public companies, another only buys bankruptcies, one firm was acquired by Sallie May and decided to exit the debt buying business, and one company is now owned by Chase Bank. In reviewing the SEC filings for the three public companies, we can determine how much debt was purchased by them in 2009. NCO also posts their 2009 debt purchases, so now we need to find the amount of debt purchased by the two remaining firms to determine the total amount purchased by these nine companies.

Many of the companies listed here, buy more than fresh credit card charge-offs. Our research shows that there is still about $42.3 billion of 2008 credit card debt, plus $22.6 billion of 2007, plus $12.7 billion of 2006, and $8.0 billion of 2005 credit card debt still uncollected from past years and in the marketplace somewhere. This does not include the mortgages, auto loans, medical, student loans, telecom, checks and payday loans that are also acquired by debt buyers.

Since some of the companies do not provide information on what debt that they purchased, but did provide information about revenues, we could make some comparisons against other similar companies to determine a likely amount of debt purchased. For many of the debt buyers who did not make the top 9 list, we were able to review their websites and determine the average amount of debt purchased by these firms based on the data that was provided. As we will see, a vast amount of the debt that was charged-off in 2009 is not accounted for.

Our Research

We looked tracked down the largest debt buyers and found 42 who have either made the largest debt buyers list since 2002 which is published annually by Collections & Credit Risk (CCR), or who were generally known to be larger buyers of debt. Five of these companies were eliminated because they were based in another country and bought debt abroad, one was acquired, one was shut down and one is a part of one of the public companies. Another company also exited the debt buying business in 2009. When we subtract the three companies on the FTC list who are not purchasing credit card debt, or are now part of other companies, we are left with 35 large debt buyers in the country. Some of these firms are purchasing as little as $200 million per year and others are buying in quantities of $1.0 to $2.0 Billion or more. There were six companies that we could not find any purchasing information on, but in most cases we were able to locate revenues, news articles and previous ranking information, where we could develop an estimation of the debt being purchased.

As previously mentioned, not all of the debt being purchased is fresh charge-offs. Even the public companies buy more than fresh and some companies are buyers of student loans, auto deficiencies, telecom etc., and the purchasing percentages between asset classes is almost never revealed. In other cases the company may have reported purchasing so many billions since 2002 for example. With so many holes in the data it was really a challenge to determine a figure at all. With some very good data points of reliable information we were able to determine that the major debt buyers purchased about $42.3 billion dollars worth of inventory last year (2009). Interestingly, this is almost the same amount of credit card accounts that were charged-off by the banks in 2008. According to CCR, the top 11 debt buyers, acquiring $28.2 billion of these accounts in 2008.

This left us still wondering where all the other accounts that were charged off in 2009 are. Since the total charge-off was reported at $83.27 billion in 2009, and we can account for roughly less than $42.3 billion in all credit card debt purchases, that leaves over $41 billion in face value not accounted for. (The figure is really much higher because not all the purchases were fresh charge-offs). This is more than half the 2009 charge-offs and some estimates say the real number may be closer to 70% of the debt written-off by the banks is still owned by those issuers and being collected by them, or is being warehoused until the debt prices improve. (There is speculation that there may also be a shortage of fresh debt currently available to be acquired by debt buyers, who were not part of a forward flow, in order to escalate the pricing).

Most debt buyers have learned not to pay too much for their inventory, particularly those who may have been burned by some of last years forward flow arrangements.  Recovery rates are still very low, and financing is generally still difficult to obtain. Yet there is also a fair amount of older debt still on the market, and for many this has ultimately been more profitable than the fresh portfolios in this economy. The trouble that we see with so much debt being held by the banks is twofold: First, without being marketed there is no real price discovery or way to determine the current market value of these accounts, so when this debt finally does hits the street, it could be in such a volume that the prices collapse. (Unless the banks' new business model is to collect themselves) The second problem is that the charge-off rates have not declined at all this year. So, 2010 write-offs are also piling up. If we are on track for the same level of debt purchases this year as we were in 2009, with the same level or higher of charge-off rates, how does all this new debt get serviced or does it get warehoused, too?

Clearly the collection industry was not sized to service this entire amount of inventory and maybe only a portion is really being worked. Considering that the amount of charge-offs more than doubled between 2008 and 2009, and many of those 2008 and 2009 accounts are still in collections, plus the 2010 accounts now being worked.  In addition the 2005, 2006 and 2007 accounts still being collected.  We calculate the actual debt in circulation to be about $164 billion of credit card accounts in collections (or storage), and credit cards only make up about 24% of the entire collection industry. I think Apollo 13 said it best: "Ah Houston, I think we have a problem."