August 27, 2021
The COVID-19 pandemic has opened the eyes of the financial world to the number of troubled assets on the books of various financial institutions and other creditors all across the country. It is not as though there weren't already significant amounts of troubled and underperforming assets in existence before the pandemic, but that number has only grown as the economy faltered and unemployment caused businesses and individuals to defer or default on debt.
Most reading this article have a long enough memory to recall the government program known as the Troubled Assets Relief Program (TARP). Congress passed the TARP to address the troubled asset crisis in the midst of the Great Recession of 2008-2009. There is no indication at this time that additional major government assistance programs are needed or are in the works, but the problem of underperforming assets is still significant. Private parties will need to figure out their own solution for clearing their books of these assets.
Debt buyers are hungry to purchase underperforming debts, and they have raised billions of dollars for this purpose. According to a 2019 analysis by real estate company Clever, about seven in ten Americans are unable to pay off all of their credit card debts within a year. They say the following:
While the average revolving credit debt per U.S. household — an estimated $6,929 according to NerdWallet — represents a relatively small portion of total household debt. The high interest rates can make it particularly problematic and difficult to pay down.
With credit card APR jumping up to 17.64% – a new record high – it's never been a better time to pay off your credit card balance.
Keep in mind that this was an analysis from 2019 before the COVID-19 pandemic had touched the United States and began to wreak havoc on the economy. In the pandemic, payment holidays and deferments slowed the volume of debt available and created a supply/demand imbalance. This has created the high prices currently available in the market. This debt is held on the books by the original lenders. Many of those lenders are looking to monetize these underperforming assets and establish a relationship with a well-capitalized and professional partner. In fact, about 70% of all debts sold off to outside buyers are credit card debts. The remaining 30% consists of a variety of auto loans, utility bills, phone bills, medical bills, and first or second mortgages. Individuals may hold all of these debt types who become overextended and need a long-term workout solution.
The current economic atmosphere has a lot of institutions eager to take on risks to achieve a reasonable rate of return. The reason for this is that fixed-rate investment instruments such as government treasury bonds and the like are paying incredibly low-interest rates. Even savings accounts are paying an average of just 0.06% APR at this time! This climate means that investors have to seek out other forms of investment to generate a sustainable growth rate on their money.
There is such a scramble for debt purchases that buyers are competing for the limited pool available and that has driven up pricing. In other words, the buyers are willing to assume the risk in certain circumstances even without an assurance that they can achieve a return or even their initial purchase price. It is a gamble to be sure, but that is what some are willing to do to generate some interest in their money.
Selling underperforming assets to debt buyers surely sounds like a great deal for banks, credit unions, and credit card issuers to accelerate cash flow and get some less than ideal accounts off their books. However, most do not want to put themselves in a position where they get periodic boosts to their balance sheet via these sales but are unable to maintain steady or consistent profits because they are uncertain as to the future price of sale pools. Instead, some are opting to use a "forward flow" agreement to create a more consistent income flow from the sale of these debts.
A forward-flow agreement provides some of the following benefits:
Lenders tend to be forward-thinking institutions that value consistency and stability in their portfolios of investments. Getting to that point might mean selling at least some assets to debt buyers.
Remember that the sale of debt assets is complex and requires the careful hand of those who have experience establishing these types of contracts. Garnet Capital Advisors is your ideal source for creating these business relationships for you. We are a highly experienced firm that knows how to create these relationships and ensure that they serve your best interests. We are happy to go over your entire portfolio of debts to sell and work with you to construct an agreement between yourself and a debt buyer to sell those underperforming assets in a flow method that will keep cash flows consistent. Lean on us to bring you the deal that you require. Please contact us for more information on how to begin the process of setting up a debt-selling agreement.