When the Roller Coaster Becomes Routine

Michael Flock Industry Insights Leave a Comment

Few predicted the financial crash last month. Even fewer predicted the almost daily gyrations in the stock market and chaotic credit policies of major banks and financial institutions. So much for stability and certainty.

Two months ago we wrote about the “Roller Coaster”, weeks before the crash. Today the “roller coaster” is the routine, the status quo. Change and chaos are the constants. Who moved my cheese? The world has turned upside down. We’ve witnessed a historic national election, reflecting the sweeping political, economic and generational changes of our times.

What does all this mean? Can we still thrive or survive? Is the Age of Prosperity over? What is the impact on the world of credit and collections?

The answer is that we need to see the world differently.

What is certain now is the roller coaster and will be for some time. The extreme is the routine. Yet, there are ways to profit from the market if we can shake our old mindset. With prices plummeting in the debt purchasing world, it is time to jump in with prudence. While liquidity has declined between 10% to 30% depending on asset classes, prices have declined even further, and returns for debt buyers, their lenders and investors are forecasted to grow dramatically.

But, the challenge is twofold: correctly forecasting future recoveries, and finding capital to finance future purchases.

  • First, forecasting recoveries is more art than science. You must know your paper, and be able to dissect liquidity by segment so you can segment your operations and collections to optimize cost and recovery at the same time. Risk management tools and software are critical to sustaining results.
  • Second, capital markets continue to be tight and funky. Terms vary by the day. Old lenders put plans on hold and exit. But, new funds, particularly private equity, enter as the lines between mezzanine debt and equity begin to blur. If you have high priced purchased inventory, you may be in trouble if your yields are down. However, if you paused in past years and were cautious when prices were high, you are probably in great shape to get new financing at a time when the volume of debt sales is about to soar with prices forecasted to decline further.

So how does one profit in times of peril?

If you’re a collection agency, shore up your balance sheet, watch your labor costs, leverage technology to maximize recoveries. If you have plenty of cash, you might look at acquisitions of agencies in stress who may be suffering from too much client concentration and too much leverage.

If you’re a debt buyer with a good track record, line up your capital, be prepared to accept some stiffer terms, but if you can achieve yields of 20% or more assuming another 20% decline for 2009, increase your buying. You might also look to scoop up some debt buyers hungry for equity to raise new capital for the future. If you don’t have a strong record for the last couple years, look for partners, either industry partners to help you recapitalize your business, or new lenders willing to recapitalize your old debt, or private equity players eager to enter the market.

While there are clearly many new opportunities for debt buyers, finding the bottom of the curve is difficult. According to industry leader and Managing Member at Ravinia Management Company, Irwin Bernstein:

So long as you buy assets at a price that allows for a profit from a collection strategy, it is not necessary to try picking the market’s ultimate low. If a debt buyer spreads his risk among different purchases and consumer groups and doesn’t rely on a resale strategy there will be opportunities to profit even in the most difficult of times.

At the recent ACA Fall Forum in Chicago, Bernstein shed some light on the current environment, the current “roller coaster”. He dusted off an old economic theory developed by Nikolai Kondratiev of Russia, who in 1925 theorized that world economies moved in waves or cycles. Like the four seasons, economic cycles were actually a positive force for stability. Bubbles burst bringing prices and asset values down which is necessary to stimulate growth again. The curves also reflect debt buildup and debt repudiation. These waves last forty to sixty years and have existed for centuries as the chart below reflects. Modern economists have refuted his theories, although Joseph Schumpeter, another economic scholar, was said to have been inspired by Kondratiev in developing macroeconomic theory.

If you look closely, the lines of these curves or waves resemble the roller coaster, only they fluctuate only every fifty years or so, not every day. Today’s daily waves are a microeconomic slice of a macroeconomic trend.

Robert Samuelson of Newsweek put it well when he quoted the Wall Street commentator, James Grant: “We suffer cycles of self-delusion, sometimes too giddy and sometimes too glum. The next recovery usually lies in the ruins of the last recession.”

So maybe the lesson of today’s volatile roller coaster market, is that it is a good thing, and necessary to find stability and certainty. Whether you buy debt or collect bills, there are silver linings in the cycles. So the roller coaster is the routine. Embrace it. Find profit in it.

About FLOCK Specialty Finance:

FLOCK Specialty Finance is dedicated to alternative funding in a variety of specialty finance segments. FLOCK’s mission is to provide clients with capital and expertise for the purchase of both charged off debt portfolios as well as for the financing of subprime consumer obligations. FLOCK has funded over 600 portfolios since 2013.

FLOCK believes its funding is “More Than a Transaction”. FLOCK’s proprietary financing structure provides growth-minded clients with a competitive advantage in multiple asset classes. Founded in 2007, FLOCK is headquartered in Atlanta, GA. For additional information, please call: 770-644-0850 or contact us today.

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