Everyone has their own opinion about “liq” rates, OR DO THEY?
We rarely hear the word liquidation at industry conferences. I think that’s because if liquidations were actually talked about some folks might have their feet held to the fire.
It’s easy to say, ‘you will make three times your money in five years.’ Oops, remember when the smartest people in the industry said three years? I was not one of the smart people.
It’s harder to say that to achieve that return you will liquidate only 3% a year for 5 years.
So, if you paid 5 cents on the dollar a portfolio will have to produce 3% a year for five years. That sucks on 5 cent paper.
The pronouncements of three times your money in 3 or 5 or however many years is a tired, worn out theory that needs to be put to rest. What will happen when it can’t be done in five years?
Lets talk liquidation. On a super large portfolio the liquidation rates may take longer to achieve. But lets aim for a shorter period than five years. If we liquidate better we can buy more debt, or we don’t need to buy as much. It depends on your business model.
Liquidation rates will be all over the board. We believe liquidation is achieved through collections, legal strategy and resale.
No matter how much is spent on a portfolio it should only achieve so much in liquidation.
In discussing collection to achieve liquidation, we will say that heroic and expensive measures are not to be taken. Just “normal” collection efforts and a good solid skiptracing process.
If ongoing purchases are 150 million in chargeoff balance over a year we would expect to see the following liquidation rates. From a major prime issuer. These are 12 month overall liquidation rates.
Prime….no previous agencies…..8% liquidation.
If the purchases are more than 150 million in chargeoff a year these numbers may go down…if less they may go up.
We believe that targeting a higher liquidation rate and then working to achieve it in a realistic way might produce better results.
Smaller specific portfolios could liquidate at 2.5 times more at prime, 4.5 times more at seconds and 10 times as high on tertiary.
MOST portfolios could liquidate better if people would quit comparing their liquidation to the “industry standard”.
Liquidation to a debt buying collection agency or a collection law firm means one thing and to an investor it means another. The investor has collection fees to pay.
We like to say that the price of the portfolio should mirror the liquidation achieved.
If, after our internal processes and scoring indicates we should purchase a portfolio, we would expect the following liquidation.
If we pay less than 3.33% we expect 3 times that in liquidation.
For example, if we pay 2% then we expect a 6% liquidation.in 12 months.
If we pay 3% then we expect a 9% liquidation in 12 months.
Now, if we pay more than 3.33% we expect a 10% liquidation in 12 months.
Liquidation can be achieved through collections, legal collections and resale.
Every portfolio we buy is viewed from the standpoint of, can we collect this?
Making the money through high priced back end sales is a poor model. It is risky to count on high prices in the resale market.
These liquidation rates are for agency purchasers. Investment purchasers may show different liquidation rates. If we are collecting we can be very selective and buy fewer portfolios. Investment money needs to work. To accomplish return rates for investment money we target a 30% annualized return.
So, if we pay 3% for an investment portfolio we would need a gross liquidation of about 8% in 12 months. After collection and management fees this would achieve a 30% annualized return. In our models most of the portfolio is gone at the end of 12 months. Accounts in a payment status continue to produce into the next year and beyond.
A legal collection strategy will yield different liquidation rates. We still would expect to see the price of the portfolio recovered in 12 months.
Achieving these rates requires constant management of portfolios.
Liquidation rates can be improved through better management of the process required.
Strategy, scoring, segmentation better internal processes can all make portfolios liquidate at a better rate. If liquidation rates stay at the “industry standard”, the industry is in trouble.