Hi, my name is Thomas Edwards. I am Marketing Director at Debexpert. Last time, I discussed why we believe an auction is the best way to sell delinquent debt portfolios. Today, I will talk about the types of auctions and how to use them to get the most out of a debt sale.
The most popular auction in the world is the English auction. This is an auction with classical mechanics that we all know very well. The English auction is when the seller sets the initial price of a pool and the buyers bid, thus raising this price. As you know, anything can be auctioned — art, luxury cars, or, as in our case, debt portfolios. The highest bid wins. It’s straightforward. The English auction is also known as an open-outcry auction. Sometimes, the bidders are not very active, and the closing price is not that different from the initial one. In this case, the debt seller can cancel the auction or move it to another day. Usually, the English auction lasts no more than an hour, which is enough time for everyone interested in the debt portfolio.
The English auction is very prevalent. However, there are other mechanics for debt selling, such as the Dutch auction, in which everything works the other way around. At the beginning of the bidding, the debt seller announces the desired price for which they are willing to sell their debt portfolio right away. As a rule, this is a reasonably high price. During the auction, the price decreases until one buyer makes a bid. At this point, the auction is over. This type of auction is also known as a descending price auction. It is quite a gambling mechanic, which takes a lot of perseverance, and you need to have nerves of steel. This type of auction is used when debt is in high demand and many companies that buy debt want to purchase it. The duration of such an auction can be anything from a few seconds to several days.
The third type of auction used when selling debt is a sealed-bid auction. In this type of auction, all bidders simultaneously submit sealed bids so that no bidder knows any other bids. The highest bidder pays the offered price. As you have already noticed, a sealed-bid auction is based on the English auction; the only difference is that the bids are not public. Simply put, if a bidder bids too low, most likely, they won’t get the portfolio. Sealed-bid auction is used for debt sales when there are several buyers for a debt portfolio.
But that’s not all.
Our debt marketplace also offers a hybrid auction. This is an advanced version of the classic auction. Usually, only the buyers are active during an auction, while the debt seller is invisible. In a hybrid auction, both parties are engaged. Buyers can ask the lender any questions to justify their price. The lender, in turn, can also explain their price. Not all sellers want to participate in debt selling, but some like to prove their case. The more persuasive the lender, the higher the closing price will be. Hybrid auctions can last for a week or even longer.
What type of auction should I choose when selling a debt portfolio? This question can only be answered after analyzing a masked file. In most cases, the English auction will get you the highest market price. However, there are situations in which other types of auctions work better. Sometimes, a portfolio is sold in two rounds. For example, the first round is a sealed-bid auction, and the second round is the English auction. There are a lot of ways to do this. That’s all for today. This is Thomas Edwards of Debexpert signing off. Stay tuned.
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