The upshot of Sallie Mae's recent acquisition of Arrow Financial Services on the consumer debt purchaser's securitization activities is still uncertain. However, Arrow Chief Financial Officer Michael Valentino intends to stay in the ABS game for the exposure.

"Sallie Mae was surprised to find during their due diligence that our internal cost of funds was cheaper than the capital markets," Valentino said. "We want to stay in the capital markets for the intangible benefits we believe accrue from being an ABS issuer."

There is a certain cache attached to being the only ABS issuer in a sector, Valentino said, and it enables the rating agencies to come in and take a good look around. Additionally, the firm appreciates the discipline. "We like having the institutional investors come in and kick the tires. They come in and make suggestions that protect their bonds, and by extension, protect everybody," Valentino said.

Arrow last tapped the ABS market in February with a $40 million self-brokered securitization backed by a mix of assets including charged off utility bills and credit card receivables.

The fate of Arrow's securitization program hinges in large part on how much investors are willing to come in on the price of the bonds. Valentino expects the company's already low cost of funds to come down even more with its acquisition by Sallie Mae, further widening the gap between the cost of ABS issuance and Arrow's internal cost of funds."The question is whether the ABS buyers who bought our bonds in the past tighten up enough to make it attractive for us," Valentino said.

Historically, Arrow underwrote its own securitizations, which helped to keep costs down. Even so, securitization has always been a relatively costly proposition for Arrow, particularly in light of the short duration - typically between five and seven monthd - of these transactions. "When you have a bond with a five month duration, even a small cost in absolute amount drives up costs quite a bit when you apply it to all in yield," Valentino said.

One possibility is that Arrow would access the ABS market less frequently, rather than withdraw from it altogether. In the past, Arrow aimed to complete a securitization every seven to nine months. Going forward, the time frame could shift to every 15 to 18 months, Valentino said.

Currently, Arrow has no need for third party debt, and there are no immediate plans to come to market. Nonetheless, Valentino did not rule out the possibility. "We never used ABS as a financing vehicle; we always used it more for its intangible benefits," Valentino said.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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