Tuesday, January 12, 2010

Restraint of Trade

In our post of January 4 entitled “Back to the Big Picture” we said that it would be up to the TRE Buyers to provide the counter-weight to the Exchange’s clear incentive to push for volume at the expense of quality. And in assessing the likelihood of that we said that the evidence at this point is mixed.

A number of instances of Buyer restraint can be pointed to in making the case on the positive side. I’d like to point out just one today, because I’ve been watching this situation and wondering how it would play out.

There is an active Seller that has been posting the invoices of a high-name-recognition Debtor since mid-October. The terms of the invoices call for payment in 60 days.

The Seller has been posting invoices of this Debtor at the rate of more than one per week and the auctions are of greater than average size, so a significant amount of money is involved.

I’ve been watching to see how the payment pattern would actually develop. After all, high name recognition doesn’t mean they pay well!

To date, there is no record on the TRE platform of a payment having been received from this Debtor, and the invoices included in the earlier auctions are now well beyond their 60 day terms.

It is important to note that none of the auctions has reached its re-purchase date. So I’m not suggesting that there is any default in the offing. I am using the situation only as a way to analyze and discuss the bidding pattern.

This Seller had sold invoices due from a number of other Debtors before the first auction of this Debtor’s invoices. So Buyers were used to seeing the Seller’s name. And the name of this new Debtor is a good one. So the auction was well-received. It sold right in the middle of the posted range.

Over the next ten, or so, transactions involving this Seller/Debtor pair, the pricing tended to decrease i.e. the discount demanded by the Buyers fell until it hit a low point about 48 days after the first auction. At that time, of course, no payment from the Debtor had been received.

Now, TRE management frequently points out a pattern of declining cost as auction history is amassed by a Seller.

I’ve never quite understood why the prices should get better for the Sellers until a pattern of actual payment has been established. From my point of view the greater the volume of unpaid invoices from a particular Debtor the higher (as opposed to lower) the discount should be on the next deal. But that’s just me, I guess.

But what has actually happened in this case does show some Buyer restraint.

Since that low-point in pricing was reached, half-a-dozen more auctions of this Seller/Debtor pair have been sold. There has been a clear movement toward higher discounts as those additional invoices have been brought to market while the lock-box has remained empty.

Buyers can argue about the attractiveness of this Seller and they can argue about the absolute level of pricing. They can even argue about the length of time it took for the pattern of pricing to change.

But, on a big-picture basis, the shift in pricing as more and more of the paper was sold without a history of payments being made, is rational.

The discount SHOULD go up under those circumstances. And maybe, when payments begin coming in, the pricing pattern will reverse.

But, in the meantime, a little restraint of trade is a positive sign.

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