When it is necessary to sell a debt portfolio, the first question that arises for the lender is: “What type of sale should I choose?” By choosing the most convenient way of selling, the debt seller can count on a higher price. In this article, we will observe what sales methods exist and what criteria to follow when choosing.
There are two types of debt portfolio sales: Sealed-bid sale and English auction sale.
Sealed bid sale - debt selling process in which offers from buyers are received in a closed form. That is, debt buyers do not see each other's offers.
Picture 1. Example of collecting price offers for Sealed bid sale
English auction sale - this is a model where buyers see each other's price offers and have the opportunity to increase their offers.
Picture 2. Example of changing the price and number of participants at the English auction sale
Let's look at which of these sales methods is suitable for a particular type of debt portfolio.
When evaluating a secured auto loans portfolio, buyers consider each debt individually using special software. They estimate the car's residual value by VIN and deduct the costs of repossession, liquidation, and negotiations with the debtor so they can come to some reasonable portfolio assessment. As a rule, this estimate has a relatively small discount depending on the portfolio size. Therefore, the size of the potential margin of the buyer is also tiny. Thus, when buying such debts, buyers rarely and seldom increase their price offers. This means there is no need to create direct competition between buyers and the sealed bid type of sale is most suitable for this type of debt.
Selling BHPH notes is quite similar to selling auto notes. Therefore, the type of sale of the debt portfolio is also a Sealed Bid type of Sale. You can read the arguments above.
Unlike the sale of auto and BHPH notes for debt buying companies, it is more difficult to determine the purchase price of PDL or Installation Loans because it is challenging to predict recoveries - debt has no collateral. This leads to a large discount on the cost of debt when buying and, as a result, to a larger size of the potential margin of the debt buyer, therefore, when selling such debt portfolios, we recommend using the English Auction Sale type, because it allows you to determine the correct market value of debt assets.
The sale of credit card debt is quite similar to the sale of PDL or Installation Loans. Therefore, the type of sale of the debt portfolio is also the English Auction Sale type. Please read the explanation in the previous part.
The only difference is that the quality of borrowers is better, so the accuracy of foreclosure prediction is higher, and the margin size is lower.
Debt buyers evaluate Real Estate Notes based on the value of the property. To do this, they rely on DDQ reports, analyze which debt obligations are attached to this property. Buyers use similar services, which means they come to similar price values and the difference in the offer may be due to the cost of capital and the buyer's ability to work in a specific territory. For this debt trading, we recommend the Sealed-Bid type of Sale for this auction.
Fortunately, not everything is so black and white when selling debt portfolios. Sometimes a shortage of inventory on the market can lead to increased demand and the use of Sealed-Bid Sale will not be profitable for either the buyer or the seller, so Debexpert has invented its own type of sale, which is called Hybrid type. It allows you to collect price offers from buyers for several weeks while notifying the buyer if his price offer was outbid by another buyer. This type of sale has proven itself well for various landers.