Group Purchasing of Charged-off Consumer Assets at Wholesale Pricing - National Portfolios, Issuer Direct
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Portfolio Modeling for Debt Buyers

Modeling Portfolios prior to purchase has provided the Loan Buyers Group with an opportunity to explore various recovery and resale options, which have helped us determine the price we can pay for new purchases. Our proprietary Portfolio Model looks far beyond the just the stratification of a file and is not a scoring model.

The stratification of a file is just a method of sorting data where we can find the average balances, state distributions, average last pay dates, and we can sort the information in such a way to stratify the results. If we want to know for instance, how accounts in the Portfolio between a $1,000 and $1,500 average balance, the stratification will provide us that information. The same is true if we want to know how many accounts or what percentage of the total number accounts being purchased is located in a particular state, we can find that data through a stratification process.

A scoring model that is typically run through an outside service, would give us a ranking of accounts within the portfolio of the most likely to pay. These are very sophisticated algorithms that use data sets obtained from many sources to track the patterns of people. These data sets are constantly being adjusted for changes in demographics and the results are provided by the vendor with a score, which is the prediction of who would have the highest propensity to pay. These models provided a priority list for the collection agencies as to who should be called first within specific geographic areas.

A New Portfolio Model

While both stratification of the Portfolio and Scoring are useful tools, neither provides an idea for the Debt Buyer to determine the profitability of a Portfolio, or a method to compare multiple options for the management of the Portfolio to achieve the best results. What we have developed is called a Recovery Model, and it differs from the other models in various ways. The purpose of the Recovery Model is to predict cash flows and determine the point where the Portfolio will break even based on the strategy used. We then compare the results of various collection and resale options on a single chart, to review the differences in cash flows and Internal Rates of Return (IRR). With the preferred option determined, we develop the correct collection and resale treatment for the accounts.

The basic components which will determine how a Portfolio will perform are:

• The acquisition price of the Portfolio
• The recovery rate (liquidation rate) of the Portfolio
• The collection and overhead costs
• The resale value of the uncollected accounts

The acquisition price and the collection costs, which include any purchase fees, management fees or overhead costs such as insurance and license fees are generally known and can be readily estimated. While liquidation rates and resale estimates are typically derived from past experience with a similar Portfolio or input from brokers or other debt buyers.

The following Portfolio Model displays the gross recovery and net distribution for one alternative being modeled. When we model a Portfolio we examine a variety of options so we can compare the total projected recovery, profit projections and IRR’s between different strategies.



As can been seen in the Portfolio Model, the top of the middle blue band titled “Portfolio Collections”, represent the gross collections over a 24 month period. The “Collection Costs”, Management Fee and Media / Other are then subtracted from the Gross Collections and added to Portfolio Sales, to produce the red dashed line identified as “Net Distributions”. When the dashed red line crosses the “Purchase Price” line, the Portfolio starts generating profit for the debt buyer.

Using the same alternative as above in our Portfolio Sample, we then chart our net profit projections as well as calculate our Internal Rate of Return and plot them together as shown in the next chart.


When we combine the net profit projections and IRR’s for various alternatives onto a single quarterly chart as shown below, we can visualize some of differences between to Portfolio options.

General Notes about the Charts:
• Profit is calculated by dividing Net Cash Flow after all Expenses by the Original Investment
• Net Cash Flow includes all revenue from Collections and Sales less all Collection Costs and Broker Fees
• Different scales are used on the Right & Left Axis to allow comparison of different types of data on the Chart
• Breakeven Analysis reflects Net Profit above the Breakeven Line (Break Even is Net after all Expenses)
• Seasonal fluctuations will affect Collection Results and Resale Values
• IRR is calculated using the Standard Excel Function
• Portfolio Sales, Collections and Collection Cost Charts are modeled at 24 Months; Cash Flow and IRR at 36 Months

Notes about Model Variables:
• Portfolio Acquisition Price, Monthly Liquidation Rates and Portfolio Resale determine the profitability of any Portfolio
• Collection Costs & Management Fees are typically in a limited range & small changes will have a negligible effect on the Portfolio’s performance
• Loss of accounts due to a high number of Bankruptcies has a negative impact on a Portfolios performance
• Notes about Liquidation Rates:
• Gross Liquidation Rates are the Gross Collections Divided by the Original Face Value Purchased
• Net Liquidation Rates are the Gross Collections minus the Collection Costs, divided by the Original Face Value
• Net Liquidation Rates are utilized to Track the performance of the Portfolio in the Monthly Reports
• Gross Liquidations are used to develop the Portfolio Recovery Projections
• Liquidation Rates are developed from LBG history with similar products, Collection Agency Input and other sources

Notes about Resale Values:
• Resale values used for the models are based on an average of a minimum of 2 Broker estimates
• Resale prices for portfolios generally decline rapidly following the charge-off date, and flatten as the Portfolio ages
• During some market cycles, Resale Prices May Remain Flat (or Increase) over a period of months after charge-off until Depreciation begins
• Resale pricing will vary significantly based on Age, State Distribution, Balances, Issuer, Prior Ownership & supply

Notes about Remaining Inventory:
• Face Value of Remaining Inventory declines when accounts are lost to Bankruptcy and when Accounts are settled
• Remaining Inventory is impacted by Deceased, Disputed, Jail, Fraud and other accounts deemed to be Unsalable
• The Remaining Inventory Balance is multiplied by the Estimated Resale Price to determine the Gross Sales Value
• Payer Accounts, Prior Settled, and Keeper Accounts are not included in the Remaining Face Value Inventory
• Portfolios are scrubbed for Bankrupt & Deceased Accounts Prior to sale which may impact the Final Inventory Balance
• Bankrupt & Deceased Accounts are sold on a regular basis. Recent Chapter 13 accounts pay more than Chapter 7.

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