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The Red Flag Goes Up At PRAA

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I'll see your "long term" and raise you a "short term"

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I have previously suggested that the new Bankruptcy Act might inflict a fair amount of paying on debt collectors such as Portfolio Recovery Associates (PRAA) and ASTA Funding (ASFI). My reasoning is here.

Last night PRAA reported a good quarter and the stock today is up 25%. I am not surprised that the company did well. The new bankruptcy law was just recently signed by the Prez and will not go into effect for about 6 months. But that's the past. Asked by an analyst how the bankruptcy changes will affect PRAA here is the verbatim response:

"Well [ph] to think over the long-term, it's going to be a positive thing. Anything that pushes our customers from a Chapter 7 bankruptcy filing, which is typically a zero recovery for us into a Chapter 13, where we're getting something is a good thing, not only that but it will keep alive more receivables for the sellers and so ultimately it should create more volume for the bad debt sale market. And so, we think though all things being equal, it's going to be good for the market long-term." (Emphasis added)

Whenever a company says that some situation will be good in the long term it is safe to interpret it to mean that "first we are gonna get hammered, but that too shall pass."

That's really all I needed to hear to add to my short (not advice) in a much more meaningful manner. My sense is that the market has a decent idea that the Bankruptcy changes will be bad in the short term. But I also think it is significantly underestimating how bad the rash of Chapter 7 filings will be over the next 6 months, and, perhaps more importantly, the price increases that debt sellers will command for defaulted loans that, whether in or outside of bankruptcy, will be much more collectible.

Stay tuned.

Position in PRAA
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