As the mainstream media pays more and more attention to consumer and corporate debt, many want to know how to buy debt. Debt comes in a variety of flavors, from extremely safe highly-rated corporate debt to already defaulted consumer credit card debt. To buy debt, an investor must determine what type of debt he is looking for and take appropriate actions to purchase that debt.
- Determine the type of debt you want to buy. Corporate debt, mortgages, and consumer credit card debt are all different flavors of debt investments. Each industry has its nuances; an investor interested in buying debt must first determine what type of debt she wants to buy. This decision is made by analyzing the market, determining your risk tolerance, and determining your required rate of return.
- For corporate debt, research the company whose debt you would like to purchase. Corporate debt’s return and riskiness is almost solely determined by the company who issues that debt. A fiscally sound cash abundant company will issue highly-rated debt with a low risk of default. A troubled cash strapped company will issue lower rated debt with a much higher risk of default (and higher interest rate for investors).
- Purchase corporate debt from a broker or exchange. Some corporate debt can be purchased from the New York Stock Exchange just like stocks. All other corporate debt will have to be purchased through a broker (such as Charles Schwab or E*trade) either over the phone or online. Buy debt by contacting your broker and requesting the purchase – just be aware that buying corporate debt is usually not an instantaneous transaction.
- Buy credit card debt indirectly from credit card companies. Collateral Debt Obligations, or CDO’s, are issued by credit card companies. These CDO’s are composed of credit card debt – some highly-rated debt where payment is current, some lower rated debt that has already defaulted. The CDO is broken up into several different tranches with each tranche characterized by the type of debt it holds. Determine what type of credit card debt you want to purchase (i.e. how much risk you want to take), contact your broker, and buy into the appropriate tranche of the CDO.
- Buy junk bonds issued by credit card companies. Alternatively, an investor can buy debt by purchasing bonds issued by credit card companies. These bonds are typically composed of debt that has defaulted or is likely to default. Therefore, the price of the bonds are low and the interest rate high, reflecting the difficulty in collecting on this debt.
- Incorporate a company that specializes in debt purchase. Starting a collection agency will allow you to buy defaulted credit card debt directly from credit card companies or other collection agencies. Starting a company that buys account receivables from corporations will allow you to collect money owed to corporations they are likely to write off. To buy debt in this fashion, a considerable amount of time and energy will be required to incorporate your business and solicit clients.
To successfully buy debt, a potential investor must adequately research their potential investment and take the appropriate action to secure the debt they are interested in obtaining. Debt comes in a variety of flavors – some debt is a very safe investment while other debt is likely to default. Be smart, buy debt that is appropriate to you, and watch how it enhances your portfolio.