A by-product of a hot economy is a ballooning level of bad debt. Hoping to capture part of this historically risky and fragmented market, E- debt.com was launched in May with $4 billion worth of bad debt for sale on its site.
Traditionally, sellers list portfolios of charged-off debt with brokers, who then analyze the portfolios and offer the information selectively to buyers. It's a process that takes at least two months from start to finish. On E-debt.com, a portfolio can be listed, complete with sliced and diced metrics in a standardized format, and in the buyer's hands within a week, says Michael A. Zoldan, president and CEO of Akron-based E- debt Exchange Inc.
"It's all about speed," Zoldan says. "The type of asset we're dealing with is subject to a depreciating value on a daily basis." The value of bad debt will halve, from a maximum of 10 cents on the dollar, within a year of its original due date, according to Jesse Snyder, deputy editor and associate publisher of Collections & Credit Risk magazine.
E-debt.com promises to lower costs on all levels. Sellers have access to hundreds of potential buyers without having to make hundreds of phone calls, while buyers can compare a wide range of standardized metrics with a few mouse clicks, says Zoldan. Once a portfolio is sold, sellers pay E-debt.com a transaction fee of 3 to 5 percent of the sale price, below the 8 to 10 percent a traditional broker would charge.
Traditional debt brokers question whether the complicated nature of bad debt lends itself to the Internet. "In distressed debt portfolios, there's no such thing as standard portfolio descriptions," says Lou C. DiPalma, senior vice president of White Plains, N.Y.-based Cohane Rafferty Securities Inc., noting that in the past two months, his firm has sold three portfolios that failed to sell on the Internet.
He doubts a spreadsheet analysis could capture the full range of variables a buyer should consider in purchasing risky debt, or that buyers will be willing to sort through masses of information on the Internet. His firm uses analytical software that is comparable to E- debt.com's, but it adds value to it through experience and relationships, he says.
E-debt.com currently has 60 debt portfolios, with a total value of $4 billion, on the site; none had actually sold as of mid- July. E-debt is not alone. DiPalma has more than 30 Internet competitors bookmarked on his computer, ranging from online bulletin boards to more- sophisticated agents, such as E- debt, which provide portfolio statistics and related financial and legal services.