Wednesday, October 28, 2009

The Short of It Again--With a Twist

In our October 6 Post we commented on the fact that an auction of short-duration invoices had been closed at a price that seemed to reflect an increased awareness of the cost, to both Buyer and Seller, of delaying the closing of transactions that will have a short life.

That particular auction broke a pattern of prices that had held for 15 straight transactions by that Seller of invoices due from the same Account Debtor.

Our friend “Oldschool” commented that the transaction represented “randomness pure and simple”. And in fact the next three transactions did revert to the old pattern, all selling on the same “pre-anomaly” terms.

However……….there have now been 8 transactions in a row at return levels that are HIGHER, on average, than the “anomaly” that spurred us to write on October 6.

To be fair, there are other dynamics that seem to be affecting pricing in the past couple of weeks; but the break of this long-term price level for this particular Seller/Debtor pairing does not actually seem to be random.

To make the point again---the more quickly the Debtors pay, the greater the impact of the fixed TRE fees on annualized return. Auctions that are bought at low return levels face significant effective return dilution if they are paid too quickly. Full stop, as the Brits say.

Here’s another twist on the same theme.

There is a regular Seller on TRE that groups the invoices of three Account Debtors in its auctions. The average days-to-pay of two of those Debtors exceeds 40 days. The average days-to-pay of the third is less than 20 days.

In this case, holding constant the assumed auction parameters, the composition of the auction will significantly affect the ultimate effective yield. The greater the weighting of invoices due from the short-duration Debtor, the greater will be the dilution effect of the rapid payment.

Until now there has been no evidence that Buyers have been considering the weighting of the invoices of the three Debtors in determining how to approach bidding on a particular auction.

It now appears possible that an auction heavily weighted with invoices from the faster-paying Debtor is being looked at more closely and that the pricing is being affected. It’s too early to really tell…but it WOULD be appropriate.

We’re all learning things as this first year of TRE operation draws near its end: Buyers, Sellers and TRE, itself.

How could it be otherwise in such an innovative environment?

Is it out of line to suggest a TRE-sponsored gathering on the anniversary of the first transaction? There's still time!

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