Wednesday, September 29, 2010

Another Milestone

We received a payment from The Receivables Exchange this morning that closed out an auction we purchased on July 28.

It was a small auction; the first we had bought from that Seller. It contained invoices due from one regional firm based in California that I had never heard of before (but that turned out, on examination, to be quite solid) and one company known and respected world-wide.

The payment history was interestingly indicative of current patterns: the regional company paid in 14 days; the worldwide behemoth paid in 62 days.

We’ve written before about the move of larger, more credit-worthy companies to extend payment terms. One of the interesting consequences of this, for TRE and its Buyers, is that it tends to increase the working capital needs of companies that sell to those large credit-worthy firms.

The impact might be only marginal but it is to put generally upward pressure on the credit quality of the Account Debtors brought to auction by TRE Sellers.

The counter-point, obviously, is that it’s clearly NOT a good thing for the Sellers. While it’s great that TRE provides a ready market to liquefy the invoices of those Account Debtors, the net impact on the Sellers’ profitability is negative.

But that discussion is not the reason for this post.

I’m writing because the payment received this morning brought our total of closed-out auctions to the 200 figure!

That’s cool; at least it is to me.

Next stop = 500.

Monday, September 27, 2010

An Award & Bigfoot Lives

In the special Technology section of this morning’s Wall Street Journal ,The Receivables Exchange is named winner of the Journal’s 2010 Technology Innovation Award in the category of e-Commerce.

This is a well-deserved recognition of the TRE Platform, which is made even more impressive by the fact that there has not been a winner in this category since 2004.

Considering the e-commerce innovations that have come to market since 2004, that have NOT been considered worthy of an award, this is quite a compliment to the Exchange’s management and technology teams.

It’s one thing to have an important and innovative idea. It’s quite another to be able to actually make it work.

TRE has been able to do that both in terms of the basic concept of providing a liquid market for the receivables of small-mid-sized businesses and in terms of doing it in a real-time online environment that is so integrated from Seller through Exchange to Buyer, and back, that money flows, fully accounted-for, on the basis of a one-day turn-around.

A brilliant concept is of little value unless it can be made to work.

TRE makes it work and it’s making it work better all the time. Updates and upgrades to the platform are made on an essentially continuous basis. As the volume of TRE transactions continues to grow, significant additional platform development will be necessary. But history to-date provides a convincing case that the management of the Exchange and its tech people will more than keep up with the demand.

Another day of congratulations to TRE!

On another subject: to update my last post on the “reverse lurch” -- the shift of pricing power to the Sellers has continued throughout the month of September.

Bigfoot continues to make his presence felt as more and more auctions are closed by a leap to the buy-out pricing parameters. It’s difficult to tell if this is one new Buyer or a Buyer with a significant increase in allocated funds. But the tracks that Bigfoot leaves are pretty easy to follow.

When a price-insensitive Buyer is in action, fewer auctions are left for the rest of the players. That increases competition and depresses returns on the deals that Bigfoot does not buy.

To the extent that the new money is acting on the basis of lower cost, and the volume of auctions does not appreciably rise, pricing will likely remain at the lower levels. But, to the extent that some part of Bigfoot’s behavior might be modified over time as pricing lessons are learned, or the volume of product available increases sufficiently to offset his demand, pricing might well take another swing back toward the Buy-side.

That’s happened in several cycles over the relatively short life of the Exchange and I suspect it will happen again.

Ultimately, more liquidity will draw more product to the market just as more product (that the Buyers find attractive) ultimately draws more liquidity. This sort of cyclical pattern of pricing should be expected in a developing market.

Patience is a virtue, they say.

Monday, September 6, 2010

The Reverse Lurch

No, that’s not the patent-pending description of Tiger’s new putting stroke.

In my post of May 31, 2010: “A Lurch to the Left”, I commented on the fact that pricing of TRE auctions had taken a decided turn in favor of the Buyer-community.

Auction statistics over the six-week period prior to that post reflected a shift in pricing power away from the Sellers.

I also noted, though, that there had been periods when the balance of power had favored the Sellers and that it was reasonable to expect that TRE pricing dynamics would shift from time to time.

The shifts from Seller-power to Buyer-power and vice-versa can obviously reflect a variety of factors. New Buyers with a desire to put money to work quickly can push pricing down. A sudden increase in supply of auctions can have the reverse effect.

We’re also beginning to see some cyclical patterns reflecting the lumpy timing of invoice payments and the desire to quickly redeploy returned capital.

The” Reverse Lurch” I’m referring to now is a decided shift back toward the Sellers’ favor in auction pricing.

That’s been noticeable over the past few weeks but has been especially pronounced in just the past several trading sessions.

My guess is that one or more Buyers have either just begun to deploy capital on the Exchange or have significantly increased their allocations to Exchange activity.

Whatever the cause, the effect has been clear.

In the first three trading sessions in September I bid on a number of auctions at prices that would have had a high probability of acceptance a week or two ago. In several cases those auctions were bought by others very quickly at prices that reflected no desire to test the pricing possibilities.

By that I mean the Buyer accepted the “buy out” pricing parameters with no attempt to determine if a better deal might be available. In a number of cases there were other bids; some quite far away from the “buy out”; and the winning bidder jumped immediately to buy-out price level.

The character of the Exchange is such that none of us can really tell what motivations are at play in any given auction or at any given time. We can only observe what IS happening and speculate about patterns that emerge as we look back at what HAS happened.

Since the bidding of the first three days of September presented some unusual activity I decided to look back about six weeks to see what I might find.

I looked at four auctions that closed in the first three days of September. The Sellers were “regulars”. The Debtors had a good deal of payment history. So reasonable projections of duration could be made both for the new auctions and those that closed in late July. The sizes of the early September and the late July auctions were similar.

I plugged the parameters of the auctions into a model that estimates annualized net return.

The projected annualized net return from those four sample auctions averaged roughly HALF the levels those Sellers had to pay in the late July period for similar auctions of invoices due from the same Account Debtors.

That’s a MAJOR lurch!

Now, the AVERAGE auction has NOT fallen in yield in that way over the past six weeks. The pricing pressure is not indiscriminate. And it might well be that this shift is short-term and motivated by unusual Buyer dynamics.

The point of this post is to recall the reverse situation in late May and to point out that pricing DOES ebb and flow on TRE. My guess is that the magnitude of the swings will become less pronounced as the volume of Exchange transactions continues to increase.

One thing is clear: these “lurches” tend to be concentrated in auctions that might seem a bit “obvious”: meaning, for example, that the Debtor is a very well-known name.

There are still very good, if less-obvious, auctions to be had at better pricing levels.

And we should remember that it’s not clear that the “obvious” auctions necessarily deserve the pricing they receive.

There are three elements to analyze in any auction:

a) the capacity of the Seller to re-purchase if necessary,

b) the capacity of the Debtor to pay what it owes, and

c) the character and certainty of the rights and obligations connecting them.

A triple-A Debtor might appear to create an obvious “buy”.

But a triple-A Debtor that questions the obligation to pay can all of a sudden become the hardest collection case on the list.

Then it’s the Seller’s capacity to re-purchase that is the key issue in the analysis.

I'm not a golfer but I know enough to realize that a "lurch" is not a good thing in a putting stroke. But apparently it DOES happen from time to time; even to the best.

Tomorrow's another day!