Magazine article American Banker

Card Issuers Find Market for Bad Debt

Magazine article American Banker

Card Issuers Find Market for Bad Debt

Article excerpt

Card Issuers Find Market For Bad Debt

A new industry is emerging that specializes in taking bad credit card loans off the hands of banks. Though the buyers pick up the loans at steep discounts, most bankers welcome the card salvagers.

With delinquencies and chargeoffs mounting, they have little choice.

Banks and other financial institutions are expected to write off $9.73 billion worth of credit card loans this year, according to the Nilson Report, an industry newsletter published in Los Angeles. That's 11% more than written off in 1990.

The buyers tend to be traditional collection agencies that set up partnerships with investors. Recently, however, some regional banks and at least one Wall Street investment firm have shown interest.

Though they usually pay no more than 20 cents on the dollar for charged-off bank card assets, some of the groups are taking big risks in building their inventories.

|Creative' Alternatives

Some are using a technique known as "forward flow delivery," in which they agree to buy chargeoffs that have not yet occurred.

Borrowing from the gunslinging world of commodities trading, buyers pay a fixed price for future chargeoffs on a monthly or quarterly basis.

The collectors say the risks are minor and say they are better equipped than bankers to put the squeeze on late payers.

"There are a lot of pretty creative things going on," said Wayne Johnson, the founder of Integratec, a credit card collections firm.

Trading Bad Assets for Cash

Mr. Johnson and a group of investors recently bid $160 million for a major bank's $1 billion portfolio of charged-off card loans.

"It's a very legitimate way for banks to turn their bad assets into cash," he said.

Corporate lenders - particularly those specializing in real estate, leveraged buyout, and debtor-in-possession lending - have long been familiar with bottom fishers who specialize in taking distressed assets from banks. But until recently, investors have not been active in buying credit card loans.

Bankers, for their part, felt they had fairly good control over the collection process and were not actively seeking buyers.

"It's an active endeavor right now," said Kevin Murphy, senior vice president in charge of collections for First USA Inc. Dallas, the nation's 15th largest credit card bank. "There are a lot more buyers out there than I ever remember in the past."

Jumping on the Bandwagon

As in any burgeoning field, satellite industries are growing right alongside the collectors. Several corporate and mortgage loan brokers have set up units specializing in brokering bad card debt. These businesses help banks package charged-off card loans so they can be easily digested by interested investors.

Bankers, particularly those from well reserved banks, are seizing on the chargeoff market as a way to turn bad loans into instant cash. …

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