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DBSG Newsletter: The Three Waves – Is the debt sale and purchase market coming back to life?
Published on 01/08/2011

I believe we are witnessing, at long last, a debt sale and purchase market gradually - finally - emerging from crisis.  Mid-way through 2011, I would propose that we are steadily seeing a return to some version of 'business as usual' in our industry, though there is no doubt that the lay of the land is very different now to what it was pre-crisis.

At Arrow Global, we believe there are three waves of debt sales in the coming 2-3 years - each one relatively distinct, but each following on in fairly rapid succession and in a set order.  And, at the risk of tempting fate, like waves of the water variety, there is little doubt that each will indeed reach our collective shores.  It is 'merely' a question of timing, and of broader economic circumstances - two admittedly large variables.

The first wave is comprised of stranded assets.  We are currently in the midst of this wave of sale activity, with lenders finally selling assets as the market addresses the discontinuity of pre-crisis activity.  This is in sharp contrast to the stagnation witnessed in 2009 and the first half of 2010, when creditors effectively shut up shop and abstained from bringing assets to market until greater market and pricing certainty emerged.  However, the sales taking place thus far have largely been ad hoc, odd lot and non-repeatable, especially as lenders - and investors - have taken the opportunity to discontinue operations in areas now deemed non-core or less attractive.

The crest of the second wave is approaching, but has not yet broken.  This phase will represent a resumption of lenders selling late stage receivables, particularly those built up and retained throughout the financial crisis.  I predict that the assets on offer during this period will be largely post-second placement warehouse assets.  Most mainstream lenders are beginning to test the waters in preparation for this phase, releasing smaller portfolios (in relation to the many billions of pounds of pent up assets still to come) to market for indicative pricing.  The response of buyers to these test cases will help to dictate the timing of the second, and in turn third, waves.

The aforementioned third wave has not yet taken shape, but will represent, I believe, creditors re-tracing the steps of 2002-2007.  Critically, creditors will seek to gain comfort that pricing levels have returned to what they deem to be acceptable levels - as we all know, low prices, as well as a general lack of available funding in the market, were a major reason lenders resisted coming to market consistently over the last couple of years.  This return to normalcy will encourage sellers to market portfolios of more prime and early-stage debts.  It currently feels like this wave is still 18 months away.

The reality is that lenders will simply have to sell at or above pre-crisis volumes at some point, due to the sheer magnitude of warehoused assets not yet brought to market.  Like literal waves, each of the three waves I've mentioned will inevitably hit - it is just a matter of time.  Those with available cash to buy will eventually find a wave to fish in, on terms that work for both seller and buyer.  At that stage, the debt sale market will truly have returned to normal. 

Zach Lewy

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