Face Value

Face Value as a Pricing Benchmark

In the secondary debt market, portfolio prices are quoted as a percentage of face value. For example, a portfolio with $10 million in face value purchased at 8 cents on the dollar would cost $800,000. This convention provides a standardized way to compare pricing across different portfolios and transactions.

The percentage of face value that a buyer is willing to pay depends on the expected recovery rate, the cost of collection, the time horizon for recovery, and the buyer's required rate of return. Fresher portfolios (recently charged off, with strong documentation) command higher percentages than older or poorly documented portfolios.

Components of Face Value

Face value typically includes the outstanding principal balance, accrued contractual interest up to the charge-off date, and any fees assessed under the original credit agreement. The exact composition varies by seller and asset class. Some sellers report face value as principal only, while others include all accrued amounts.

Buyers must understand what is included in the stated face value to price accurately. A portfolio quoted at $10 million with significant accrued interest may have a lower collectible amount than one where the face value is primarily principal. Clarifying the face value composition is a standard part of the due diligence process.

Face Value and Recovery Economics

The relationship between face value, purchase price, and actual recovery determines the buyer's return on investment. A buyer who pays 8% of face value and recovers 16% has doubled their investment. Recovery rates on charged-off consumer portfolios in Canada typically range from the low teens to the low twenties as a percentage of face value, depending on the asset class, account age, and collection strategy. Understanding these dynamics is fundamental to successful portfolio acquisition.