Thursday, November 12, 2009

Caveat Emptor #1

In our post of November 3 we urged The Receivables Exchange to adhere to its policy of requiring quarterly updated financial statements from TRE Sellers and posting those statements to the TRE Platform.

In early posts on this blog (see particularly those in June and July) we made the point that TRE, itself, takes no responsibility for the accuracy or adequacy of the information provided to Buyers. It is the Buyer’s responsibility to perform whatever due diligence it considers appropriate.

Caveat Emptor: “Let the Buyer Beware”; is the position taken in the TRE documents.

Fair enough--as long as we know the rules.

On the other hand, while I stand by my compliment to the TRE Seller-sales staff in our last post. And, while I understand that bringing more product to the market is a critical TRE objective at this point. It is also in the long-run best interests of the Exchange to balance its attention between the interests of the Seller community and those of the Buyers.

Providing updated financials would be one way to illustrate that balance. The basic point I made on November 3 was that it is important to Buyers to track changes in the financial condition of Sellers after their initial qualification.

I had a reminder of that this morning.

One of my disciplines as a Buyer is to get third-party credit information on all Sellers that make it through my initial analytic filters. Some providers of credit information send out “alerts” to those who purchase information, communicating subsequent changes.

I received such an alert this morning on a company that is a TRE Seller.

This company has completed a number of transactions on TRE since the spring, apparently without problem. The financial statements made available at the time of its first transaction were as of April 30. No updates have been provided.

As a Buyer, I would hope that the Seller’s use of TRE would have allowed it to better its financial position over the course of its experience with the Exchange. But I got an alert this morning that it’s rating for “risk of late payment” has deteriorated and that a state tax lien had been filed against it.

Now, neither of these alerts constitutes a “life threatening” event. But both convey information that is important to me.

If an auction by that Seller is posted today I will have to approach it more cautiously than I would have last week. Until I can see updated financial statements I will have to assume that they would be weaker than those I have in hand.

That might be fair, or it might not. But that’s the position that “caveat emptor” requires.

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