Rising Consumer Debt and Its Impact on Businesses and Creditors

On this podcast we address some of the domestic and global factors driving inflation and higher consumer debt levels, take a look at how receivables portfolios may be affected, and review steps that businesses and lenders can take to monitor ongoing developments and minimize risk. 

Transcript

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Steve Katz  

Hi, everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco global smarter perspective podcasts. As returning listeners know by now I'm your host, Steve Katz. And if this is your first time with us, well, then Welcome, we are glad you could tune in. Today, we're joined by Adam Evans, who's executive vice president at Hilco receivables. And we're going to be talking about some of the key variables with a focus on consumer debt and inflation, that stand to impact businesses and creditors in the new year, and really beyond that, as well. And we're also going to be addressing how those lenders with risk in their portfolios can approach the process of readiness in 2023, which is a critical topic of importance for all lenders. I know. Adam, thanks for joining us again, on the podcast. Great to have you here.

Adam Evans  

Steve, thanks for having me.

Steve Katz  

Absolutely. So Adam, you know, there's there's a bit of debate going on right now, among economists, and everybody's probably seen it in the news. Some say we're already in a recession, some say we're about to enter one, some say, there's not going to be a recession, you know, we just got some better news, from the Fed on rates, wherever we are, and where we're headed. We're definitely in a period of uncertainty. So to kick us off, can you talk a little bit about the dynamic that's developed overall, given that situation?

Adam Evans  

Sure. Well, Steve, one, I have never claimed to be an economist, I've never played one on TV, I don't know that anyone would, would put me in that camp. So, take that with a grain of salt. But what I will say is that, you know, we see a lot of transactions, and we see, you know, things that could be kind of, you know, macro indicators, you know, working here at Hilco and Hilco receivables. And, you know, it seems that there's a bit of a bit of a perfect storm, you know, on the horizon, as the storm clouds gather, if you allow the quick analogy, you know, as I stare out my window into the gray skies in Chicago, but it really is affecting kind of all the way through the supply chain. And you know, if we can start at the consumer level, people have been impacted by things like very high fuel prices, all all aspects of things that they're buying, you know, the prices in the last 24 months have gone up significantly. If you look at things like household debt as a metric, right, for example, household debt is now sits at about 16 and a half trillion dollars. And that's up over $350 billion from last year. So that is the fastest increase in 15 years for that metric. And if we can do like a little quick math 15 years ago, you know, from 2022, puts us in 2007. And I, you know, I was, you know, working at Hilco in around 2000 7, 8, 9. And I can tell you that the economy did not do great then. And, you know, I think as you look at some of these other metrics that, you know, that it will point that it's not going to do great, you know, kind of next year and going into the future.

Steve Katz  

I think it's obviously presenting a lot of problems for consumers, in terms of their savings level, and in terms of the debt that they're racking up on credit cards, as you said, how does it how does that translate into the into the world of receivables? And some of the things that the companies are are grappling with right now?

Adam Evans  

Yeah, I mean, when we look at receivables, you know, we look at we look at, you know, put them in two buckets, essentially, they're pretty broad, but consumer and commercial, right, so let's, let's take consumer receivables first, things like delinquency rates have been increased, you know, balances on credit cards have been, you know, dramatically increased, you know, people in 2020. And, you know, for most of 2021, you know, for the most part, we're not, we're not out, right, so people were not spending money and putting things on credit cards, they were, you know, if they were shopping, maybe they were, you know, buying home improvement products or doing more stuff, you know, buying things online, but for the most part they were they were paying down, you know, their credit card balances or at least paying them on time, when you look at things now with people having won the increased pricing pressure to, you know, the interest rates that have gone up on these credit cards, and it really kind of affects, you know, the lower the lower end of that of the consumer market first for people that are living on, you know, more of a narrow margin. So if they're, you know, buying paper towels and it went from, you know, 1299 to $20 for a 12 pack of them, that's going to be significantly impactful when you kind of figure that into your monthly budget. So those receivables you know, traditionally, you know, at least for the last 15 years or so, have collected out pretty regularly, you know, in the kind of low single digit, you know, kind of price range when you can buy some of this charged off consumer paper. You know, I would have imagine that that trend as some of these factors affect that that trend, that price is gonna go up. I don't know, if it goes up by, you know, five cents in the year. I don't know if it goes up by three cents, but it's, it's certainly going to put some more pressure on, on, you know, one of the firms that are collecting on those receivables and to, you know, the lenders that are lending money to the, to the consumer population, right.

Steve Katz  

Yeah, I mean, it certainly, it certainly seems like that would be the case. And I know, we've seen an increase in the last several years of sort of a new type of, or new mix of firms that are involved in, in lending and issuing credit, they're, you know, more technology driven this sort of FinTech type company, the rates that they charge are high, which probably, you know, adds more pressure to consumers. And, and I think they tend to market more in times when, you know, consumers are under pressure and to those consumers. So, I don't want to say they're their targets, but you know, they some of these people might start paying more interest than typical and then have even more difficulty how does that affect this sort of complexity of, of managing receivables for businesses, and for companies like Hilco who assist?

Adam Evans  

Sure, I mean, for, for kind of, for for FinTech companies, and non traditional, you know, more technology lending companies, as it relates to consumer consumer finance, a lot of times they're their target customers are going to be individuals who probably maybe could not get, you know, an American Express card or couldn't go through a traditional bank to get a credit card, because of, because of, you know, Fico rating and things like that. So, so they're going to be people on kind of the more subprime aspect of it, which allows them to charge the higher interest rates, but it also makes for kind of a riskier mix of assets, and a riskier portfolio, a lot of these FinTech companies have never been around for a decade, you know, let alone, you know, 15/20 years, so maybe they haven't seen, you know, a recessionary environment in their portfolio. And a lot of their diligence on the front end is not as much credit, you know, matrix oriented, as you know, into a long, you know, history of, of the way that the receivables perform, it's more, you know, technology driven, and, you know, they look for other, you know, kind of other metrics, you know, to put together these these financing packages. For people, it's a, it's an interesting dynamic, and it's an interesting, you know, it's going to be an interesting thing to see how that, how that affects, you know, liquidations of those portfolios, and the companies that held them, or that hold those, a lot of them are held by big private equity funds and private credit funds. So, you know, to kind of see how those portfolios react, you know, going to the, you know, the next several years, if there is a significant downturn in the credit quality, and, you know, liquidations of some of those, how quickly they're able to get out, and, you know, what, their, what the LPS think of that, you know, another another aspect of that is buy now, pay later, which I don't know about you, Steven, but if you've purchased, you know, virtually anything online, now, you know, there are two buttons to check out, right? So one is, you know,

Steve Katz  

Right.

Adam Evans  

You know let's say you're shopping for, you know, a denim jacket, like not, you know, like size extra large, tall, and you go to, you know, check out, you know, you could put your credit card, not that I'd be buying a denim jacket, but if I was, you can put your credit card in $430 and get it, you know, in five to seven business days, free shipping, of course, or, you know, you could spread out that $130 for, you know, five months in and up to 16% interest rate and, and pay it off. And it's just, it's one of those things, because you're never going to repossess that asset. So it doesn't really go that way. And, you know, it's a shorter term contract. And it's, it's, you know, people who have to, you know, they want it now, but if it's really affecting them that much, you know, it's not, it's not just, you know, spreading it out for buying a $60,000 mattress or something, it's for a, it's, you know, for more kind of standard goods. So it's, it's, those companies are, you know, they're also massive and massively funded. So, luckily, they're quicker turns on that, but I think that you're gonna see cracks in those portfolios, certainly, certainly soon. And once those interest rates started bubbling up, that jean jacket is going to cost a lot more, a lot more than that, than if he would have just paid now.

Steve Katz  

Yeah, I don't know if people I mean, I guess it's an age old problem that people really realize. So you know, what accumulates in terms of the interest in something like that, but I'm, you know, I'm having a hard time focusing on it, because I just keep picturing in denim jean jacket. So, you know, that's a little difficult for me right now. But that but that aside, what about, you know, I'm thinking about the, we talked about the US economy and some of these new forms of credit that are targeted at individuals who might otherwise not be able to obtain credit in typical fashion. What about the global economy? What's the effect of what's going on in the world overall world economy, which, you know, to some degree parallels what's happening in the US, but there's a little broader. How's that?

Adam Evans  

Yeah, I mean, there's a lot of kind of very newsworthy, you know, macro, global economic events that are that are going on whether it's, you know, kind of the continuing effects of a global pandemic and shuts down shutdowns, you know, varying country to country, you know, there's a continuing, you know, war going on in Ukraine with Russia, you know, there's still supply chain disruptions, you know, up and down, whether it's access to raw materials, whether it's things like, helium or neon gas, or, you know, other, you know, other things that countries around the world were manufacturing are very key to manufacturing certain, certain things, you know, like, like circuit boards, or, you know, or whatever, there's still a lot of stuff going on, I guess it probably always is. But right now, you know, when you kind of add everything up, it makes for kind of a gloomy or a gloomy or portrayal of that, you know, so the World Bank puts out their growth forecast, right. So in 2021, you know, the growth forecast from the World Bank was 6%. Okay, so that was halved in 2022, to be right around 3%, they have forecasted for 2023 to be less than less than 3%. So down to 2.7%. So it's, it's trending, you know, their, their, their growth forecast is not trending to significant growth, right. So it's gone from, you know, 6% to, you know, low single digits percent, and that's, that, that's going to have a lot of a lot of repercussions throughout a lot of the world, not just you know, in the US, or China or in of like, fully developed nations, but in countries that are still, you know, just getting tissue paper for the first time ever, so it's, it's gonna have significant impact.

Steve Katz  

Yeah, I mean, that's, you know, that's a big, a big dip and things may be more or less stagnation mode for a while, I suppose. So, it is a pretty imposing picture. And, you know, given all that, what thoughts do you have for businesses and creditors, who, you know, many of whom clearly have increased risk right now.

Adam Evans  

You know, I would say like, saying, like, you know, saying, no, like, know before saying, no, no, on some of this stuff is going to be is going to be important, right? So understanding, you know, kind of what your actual risk level is, by, by having a clearer picture of what your portfolio looks like, and what, what is the kind of liquidation of that, you know, portfolio, it could be consumer credit card debt, it could be commercial trade receivables, and a liquidation. It could be machinery, equipment, or inventory, but like really understanding what kind of the downside risk is, for whatever asset that is, is extremely important. And whether that's, you know, contacting Hilco to get appraisals done of receivables, portfolios, or any other asset that you have, or, you know, just kind of, you know, monitoring, monitoring this stuff closely, right, because you can, you know, kind of see these trends, and see the way that they're impacting your portfolio by pretty diligent monitoring, right. So if it's inventory, for example, you can look at, you know, inventory mixes and say, Okay, do we have enough, you know, widgets to fix, you know, or to manufacture whatever this is, you know, it's looking at, you know, trends from your consumer receivables portfolio and saying, okay, you know, as unemployment does this, how does this gonna affect it? You know, so it's, it's really kind of diligent, you know, monitoring of those portfolios, and then understanding, you know, the downside risk,

Steve Katz  

Right. And as an as the lender, staying close to that remaining and close communication with the borrower, making sure you understand the nuances all that I would imagine this is really critical to.

Adam Evans  

Oh, yeah, absolutely. I mean, not only am I not an economist, but I'm not I'm not a lender. But yeah, I mean, that's, you know, that kind of communication and just really understanding, understanding their business to the best you can and understanding what your what your exposure is, to their, you know, to this specific asset is, is key.

Steve Katz  

Yep. Yeah. Well, listen, given that you're not an economist, and you're not in the lender, denim jacket, and you're wearing a denim jacket up, you shared some pretty important and I think really relevant thoughts. And you know, receivables and sort of the risk within this financial climate. So that couldn't be better time for listeners. I really appreciate you joining us today. And hopefully, you'll come back soon with some more info maybe at the later in the first quarter of the year. Give us a little update. 

Adam Evans  

Steve, that would be fantastic. Hopefully, I'm wrong and you know, everything corrects and that's like, you know, the sun comes out and you know, everything's rosy, but, you know, I'll be I'll be back either way,

Steve Katz  

For sure. Sounds sounds good. Listen, if if people who are listening in today want to get a hold of you, what's the best way for them to reach you?

Adam Evans  

Absolutely. So, phone or email my phone, cell phone 310-795-1217 and my email is AEvans A-E-V-A-N-S @ Hilco global H-I-L-C-O-G-L-O-B-A-L .com

Steve Katz  

All right, Adam. Well, thanks again and listeners. As always, we hope that this smarter perspective podcast provided you with at least one key takeaway that you can put to good use in your business, or share with a colleague or client to help make them that much more successful moving forward. And one last thing please remember that you can always check out more great podcasts and articles featuring timely insights from Hilco experts such as Adam at hilcoglobal.com forward slash smarter dash perspective. So until next time for Hilco global. I'm Steve Katz.