Creating The Future With Jefferson Capital
By David Burton
Chief Executive Officer
Jefferson Capital Holdings, LLC
“The future depends on what you do today.”
With the Fourth of July behind us, and the fireworks, picnics, and family gatherings complete, many of us lament that summer is officially halfway over. We are reminded with a sigh that summer’s reign is just a fleeting moment. Soon Autumn and then Winter will be upon us, with the challenges of snow, ice, and cold temperatures to inevitably follow. For me, however, the Fourth of July marks another milestone: In addition to being the half-way point for summer, it reflects the fact that the year is half over. More importantly, it provides an opportunity to consider what the rest of calendar year 2023 will bring.
With a nod to Gandhi’s familiar quotation that the future depends on what we do today, the week after the Fourth of July is a reminder for all of us here at Jefferson Capital to prepare for the rest of 2023.
INDUSTRY BENCHMARKS: BANKRUPTCY FILINGS AND CAPITAL MARKETS
Before looking ahead, however, it is helpful to assess where we are at. In our industry, bankruptcy filings and capital markets are just two of several important economic indicators we follow to monitor the consumer receivables industry.
Bankruptcy Filings are again Escalating
With respect to bankruptcy filings, during the early stages of the COVID-19 pandemic they showed significant decline. For example, for the 12-month period ending March 31, 2022 new filings fell 16.5% - - down to 395,373. This decline was mainly due to various government assistance programs and relief measures, such as stimulus checks, as well as temporary moratoriums on evictions, foreclosures, and collection of certain student loan accounts. Those initiatives resulted in consumers having more available funds to pay down debts and thereby avoid bankruptcy.
More recently, however, a change in bankruptcy filings has been seen. As of March 31, 2023, the total new filings over the preceding 12 months had reached 403,273, which shows volumes are increasing again. This makes sense, as the pandemic has passed and the stimulus spending and collection moratoriums have ended. Indeed, since the start of the year Jefferson Capital has been extremely busy working with our partners to provide solutions for their significantly increased bankruptcy volumes.
Capital is Constrained
Another important gauge in our industry is the status of capital markets. In early 2020 markets showed significant volatility and uncertainty due to the pandemic. Subsequent interventions by the Central Banks, however, resulted in stabilization. Among other things, Central Banks offered record-low rates - - with 2020 showing a 65% drop from 2.1% down to 0.9%. The historically low cost of capital resulted in many credit originators and debt buyers having significant borrowing capacity to grow portfolio purchases during the pandemic.
Shortly thereafter, of course, driven by optimism attributed to a waning pandemic, continuing fiscal stimulus measures, and economic recovery expectations, the economy began heating up. The Federal Reserve started to take heed of inflation in 2022 and began raising interest rates, most recently in May 2023 when they rose to a target range of 5-5.25 percent. According to one measure, those are the highest levels since June 2006 and September 2007. Bottom line, the cost of capital for businesses is now higher than it has been in over 15 years. With higher costs of capital, the effect upon our industry is obvious. Many credit grantors are challenged by higher borrowing costs and several debt buyers have even lost their funding sources.
What does this mean for Jefferson Capital as we look towards the second half of 2023? Increased bankruptcy filings and more significant capital constraints and costs are just two industry trends we are closely following. Others include the fact that auto finance asset values are on the decline and consumer credit card debt is quickly approaching a record $1 Trillion. These signals, when viewed through the lens of the 20 years we have been in the industry, strongly suggest that the surging volumes of charged-off receivables will continue for the foreseeable future. Since January 1st of this year that is exactly what we have seen, with new record portfolio purchases being set each month.
Peter Drucker wrote, “the best way to predict the future is to create it.” In 2022 we predicted our future by investing the time and resources to expand our revolving credit facility to $600 million earlier this year. That solid foundation has continued to provide us with access to secure capital at reasonable rates, which in turn has propelled our success in 2023 while others in the industry have faced challenges.
We work to create the future every day here at Jefferson Capital. Whether new to the space or a seasoned participant, I encourage you to reach out and let us know how we can utilize our capital resources and unique recovery solutions to create successful futures together.
Onward and upward!