Definition
Consumer debt is a substantial and diversified asset class which is comprised of loans and credit provided directly to consumers, rather than to businesses and companies.
This sector encompasses a range of underlying assets, including:
- Personal loans
- Credit Card Loans
- Auto Loans
- Student Debt
- Phone and Internet Contract Credit
Performing vs Non-Performing
Typically, the underlying collateral can either be classified as “performing”, “non-performing” or “re-performing”.
Performing collateral is typically only offered to market when originators are looking to sell an existing portfolio due to a change in strategy, or merger.
Non-performing collateral is essentially defaulted debt. Where consumers have not repaid their credit to the originator. The consumer still has the obligation to pay the credit provider, but the servicer of the debt has “written off” the asset on their balance sheet.
Re-performing portfolios are books of loans that were originally written off, but a specialist servicer has got a new contract in place with the consumer, and they have started repaying the original loan or credit facility.
How does it work?
More often than not, consumer debt purchase is focused on the non-performing segment of the market. Given that these portfolios have been written off by the originator, specialist companies can often buy the portfolios for cents (or less than a cent!) on the dollar. For example, if a servicer were to buy a book of consumer debt of 1M USD which is non-performing they could be expected to pay anything from 7,000 – 70,000 USD or 0.7-7 cents on the dollar.
The debt purchase companies then use in-house or external servicers who are specialists in debt recovery. They aim to set up affordable payment plans with the consumers to realise a recovery on the underlying loans.
Once this has been agreed with the customer, this would then be classified as a “re-performing” loan.
The purchaser can then choose to retain this loan and continue to receive the repayments from the customer at a profit to the purchase price. Another option would be to package up these re-performing loans and sell them as a portfolio to investors in the re-performing market, realising a smaller profit but much quicker.
The Opportunity
The non-performing segment is high-risk, high-reward and success lends itself to big players in the market with vast experience. Across the globe, with interest rates rising and other macroeconomic factors, the opportunities within the industry remain strong.
Typically, the larger companies have various proven funding methods with large institutional partners. However, newer entrants to the market or companies expanding their presence to different geographies often require some early-stage funding, they then turn to private markets.
This opportunity can allow investors to gain exposure to a lucrative asset class which is otherwise inaccessible.
