What’s Hot in the Commercial Finance Buying Market

by Michelle Rodriguez July/August 2010
Commercial debt buyers have fared well as companies have looked for ways to create much-needed liquidity and they have proven they are more than capable of filling a liquidity void. But will the trend hold once the economy recovers and the capital markets operate efficiently once more?

If you’re a commercial debt buyer, you have likely had a very good run over the past 24 months. Our nation’s struggling economy and constrained capital markets have forced companies to seek alternate methods of creating liquidity. Commercial debt buyers have proven themselves very capable of filling the gaping void that I like to call the “liquidity vacuum.” But my question is: are we positioned to continue to burgeon as the economy recovers and capital markets begin to flow again?

Based upon more than 13 years of experience and knowledge of the credit and debt buying industries, I would like to share a few thoughts that should enable you to prepare for the prevailing winds of changing market conditions.

I have always been fascinated by the widely held opinion that the commercial debt buying industry is a counter-cyclical sector. If you hold this opinion, it means that you buy into a “feast and famine” mindset that your business will prosper during down economic cycles as delinquencies and default rates increase, and by contrast that your business will decline as collections, cash flow and credit become more manageable for your clients. While this mindset may have been popular in the not-too-distant past, it is no longer the case, and I believe this type of thinking could adversely impact the industry’s ability to prosper in an improving economy.

The real issue is not whether you understand that our industry doesn’t have to be held hostage to market cycles, but rather that you don’t lose your edge by becoming complacent and taking the current frothy market conditions for granted. I watched investment bankers, home builders, commercial real estate brokers, etc. fail to prepare for a market downturn, and I’m fearful that many commercial debt buyers may be falling prey to the same flawed logic by failing to prepare for a market upturn.

While there may be differing opinions among market prognosticators as to whether the economy has hit bottom or whether we have farther to fall, at some point most rational professionals realize that recovery will take place. When the economy, and, in turn, account management begins to improve — when your clients’ are able to generate liquidity by more conventional means — consider how will this impact your business. The correct answer is that it shouldn’t — but only if you have been smart, innovative and focused on customer centricity.

A universal truism linked to market maturation is that service providers must change and innovate as markets mature in order to survive. Those commercial debt buyers that have used the last few years to diversify their operations, add product lines, and find new and value-added ways to engage their clients, will be here for the long haul. Those who have not will be weeded-out by the increasing demands of the marketplace — it’s just that simple…

All commercial debt buyers should consider the following three trends to position their business for the future.

1.) Pricing Flexibility
As markets recover, commercial debt buyers will need to become more flexible, creative and aggressive in their pricing. Additionally, commercial debt buyers will need to shorten closing cycles by becoming much more astute at assessing risk and streamlining the closing process. In fact I’m currently seeing products such as performing portfolios close at 40% or higher; non-performing portfolios are being reviewed and grouped as early as 60 days and closing anywhere between 15%–40%; and charge-offs are closing anywhere from 1%–15%. Was this the case three years ago or even last year? No!

What’s driving these results are indicators. Some indicators that affect strategies and cash flow for both sides when due diligence is administered are: the length of time in business; a poor payment history, which involves slow pays, first payment defaults, or just no pays; high delinquencies; past and current credit rankings; the number of bankruptcies and liens located; and the demographics in the portfolios. If equipment is involved, the fair market value on that equipment and the saturation levels in the market place when it comes to reselling that equipment are also indicators; and industry ranking is a key indicator that affects the market value or appeal of portfolios.

For instance, over the last several years the construction and transportation industries have been in the spotlight of downturns, leaving us to anticipate bankruptcies as high as 20%, whereas we continue to see upside potential for medical paper. All of these indicators affect the portfolio pricing for whatever product the commercial debt buying is reviewing. In case you do not know what we consider as a product line, it would be performing accounts, non-performing, charge-offs, deficiencies, judgments and even bankruptcies. This should give you some comfort in that it promises no more waiting months or years without a guarantee of return (a true benefit when you factor in the time value of money).

2.) Product Development
Commercial debt buyers must collaborate with their clients in order to meet the changing needs of the marketplace and in doing so, expand revenue channels and profit centers. It will be tough to remain competitive moving forward if all you can do is purchase distressed/non-performing debt at steep discounts. Clients will not only expect turnkey private label servicing, but they’ll also expect commercial debt buyers to offer a broad array of professional services offerings that include risk management, portfolio appraisal services, some forms of syndication and other hybrid credit facilities.

3.) Market Expansion
Commercial debt buyers must consider opportunities beyond the U.S. border. The risk of purchasing and/or servicing cross-border debt is not nearly as speculative as it was even just a few years ago. I’m seeing private programs being developed for the captive companies and alliances are being designed specifically to bridge current gaps for both sides.

The bottom line is this … you simply cannot prepare for the future without anticipating the future. In fact, the most important job that I have is to envision the future, and anticipate what may lay ahead — my clients demand it, my employees deserve it, and it’s what good leaders do.

If your comfort zone as a leader has been limited to current market conditions, it is incumbent upon you to break out of this unhealthy mindset. You cannot grow a business by maintaining the status quo in a changing economy. For the good of your business, to the benefit of those you serve, and for the betterment of the industry, it is time to elevate your vision and begin to look forward.

Michelle RodriguezMichelle Rodriguez is president of HSW Financial, a commercial debt buyer and servicer based in Houston, TX. Rodriguez has a 13-year tenured and successful career within the equipment leasing and finance industry working in key positions for or with companies such as First Sierra Financial, Inc., American Express Business Finance, Key Bank, Pinnacle Business Finance and Hitachi Capital. She has also worked on commercial equipment lease portfolio acquisitions totaling $150 million. She holds a Bachelor’s of Science and is currently pursuing a law degree. She is a member of the ELFA, NEFA, Debt Buyers International and the National Association for Professional Women, and has also been featured on CNN 650 Talk Radio concerning her expertise. HSW specializes in acquiring and servicing both performing and non-performing equipment leasing portfolios. For more information call 888-217-8898 or visit www.hswfinancial.com

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