Don't let the plainness fool you. Although MRU Holdings, known as MyRichUncle, made its securitization debut with a deal that had no innovations or special features outside of up-to-the-minute SLABS techniques, the student loan firm is making a huge splash in its core industry.
Completed last July, MRU Holdings' $200 million first securitization was very straightforward, according to Jonathan Coblentz, MRU Holdings' treasurer and head of capital markets. An alum of Credit Suisse and Goldman Sachs, Coblentz said the company's main goals were to tell its story to the public while raising funds. The transaction did not include any proceeds from its Preprime loan product, a line of funding that has helped the company break away from the pack of increasingly competitive lenders.
These days, swelling college enrollment is creating an unprecedented demand for higher education financing, a trend that is bringing permanent change to the student lending business. Lenders are extending more private loans, and companies such as MRU Holdings are positioning themselves to be more competitive and reap the benefits of that change.
"The perspective here is that student lending is evolving from a distribution business to an innovation business," Raza Khan, co-founder and president of MRU Holdings, said in an interview. "That requires a very different type of consumer finance company."
Thus, the company is determined to stand apart from its competitors. The specialty lender makes private lending its mainstay. Only about 5% of the company's business comes from federally guaranteed loans, said Richard Eckert, an equity analyst for Newport Beach, Calif.-based Roth Capital Partners. The firm initiated coverage of MRU in late August.
Beyond that, New York City-based MRU Holdings is known for its more conservative approach to underwriting. It offers a proprietary product, called Preprime, wherein a potential borrower's major is given serious consideration in the underwriting process.
Also, the company sidestepped a lot of the scrutiny and criticism recently leveled against so-called preferred lenders by not marketing it products to students through higher-education institutions. That practice has earned MRU Holdings the nickname "the principled lender" in some circles, Eckert said.
In his view, the securitization bode well for the company's business prospects. Although the deal size is considered small by capital market standards, the fact that the bonds were well received is an indication that there is still an appetite for securities backed by t his type of collateral, which should allay some concerns about liquidity and the reliability of the firm's sources of financing.
"I think it went off better than I expected," Eckert said. "There was a fair amount of turmoil in the market. The company may have benefited from a certain flight to quality, but, then again, these loans have been long regarded as a quality asset."
MRU Holdings is focused on providing competitively priced loans for equally competitive and accomplished students. Founded in 1999 by Raza Khan and Vishal Garg, who is the company's CFO, the company was first known as MyRichUncle. Both men had attended Stuyvesant High School in New York City and worked to finance their educations at New York University. There, according to the company's Web site, their discussions turned more and more to the economics of financing a college education.
"When we first started the business, debt was the only available option, and it was limited in its availability," Khan said. "You either had to be creditworthy, or you had to have a creditworthy co-borrower. It strongly perpetuates intergenerational dependency."
Both men decided that it was time to grant talented, focused students - diamonds in the rough, if you will - a chance to mine their potential for actual capital.
"Our goal is to finance education, where the education generates a positive rate of return to the student, because that is really what education does," Garg said. "Unlike buying a house, car ... clothes, an education in most cases results in an increase in the earning capacity of the person that takes it."
If that increase is a good increase, then it can be financed, he said.
That thinking also helped the founders come up with the firm's Preprime loan product, which Eckert calls its most singular advance. The Preprime loan goes beyond its conservative underwriting techniques by taking a student's merits, grade point average, school and program of study into consideration. All of these factors are carefully weighed in the final lending decision, but the program of study is especially important because it helps MRU Holdings predict how willing and able the borrower will be to repay the loan after graduation.
MRU Holdings' underwriting technology combines the best elements of consumer credit scoring and corporate/project finance, Eckert said.
"In this regard, we consider the company's Preprime' loans a breakthrough," Eckert wrote in a report in which he initiated coverage of MRU Holdings. Although the Preprime loans can carry an interest rate of 11% to 14% per annum, according to the firm's calculations, they are far less expensive than the alternatives, which include credit cards. "We know of no similar product and consider the breadth of the company's loan offerings ... a significant and singular competitive advantage."
The company got an overall yield of 13% on the sale of the loans to the trust, and the blended yield on the notes was described as very low. Although the company did not disclose full details of the transaction, Coblentz said the structure employs a supersenior structure with triple-A, through double-B ratings.
MRU Holdings plans to complete another securitization within the current fiscal year, which ends next June 30. Depending on the flow of loan originations, the company might be able come to the ABS market as often as twice yearly.
Aside from securitization, the company funds itself through a $175 million warehouse facility extended by Merrill Lynch, which can be expanded to $500 million. Also, MRU separately finances its Preprime loans through the Education Empowerment Fund, which was set up with $100 million from a group of European financial institutions, said company officials. A $165 million facility from Nomura Securities is expandable to $300 million, according to Eckert's report.
Supplying a securitization pipeline appears to be well within the company's potential. The company expects to write more than $250 million of private loans this year, representing a market share of 1.25%, Garg said.
Executives at MRU Holdings draw this analogy about the student lending industry: it is like diamond mining, because at the very core, it is a distribution business.
For a long time, SLM Corp. (the former GSE, Sallie Mae), banks and smaller specialty finance companies distributed student loans through university and college relationships in a way that did not require a lot of creativity, because the paper was essentially guaranteed by the government. In that sense, student lenders were acting as a clearinghouse for higher education funding.
That arrangement, however, fostered a relationship that eventually became tainted with financial kickbacks to university financial-aid officers to steer business to certain lenders designated as preferred. Famously, MRU spoke out against such improprieties on a CBS Evening News segment about an investigation by New York's attorney general.
MRU Holdings made its name through the appeal of its products. The company has also gained a lot of recognition for rejecting business as usual, preferring to market their products directly to borrowers. MRU did, however, form partnerships with The Princeton Review and STA Travel to provide loans to students.
In terms of the old distribution framework, company officials think that financial aid officers ought to be regulated, especially if they take on the vital role of steering hopeful graduates through the often complex process of arranging financing for their educations. It is an important issue, Garg said, especially considering the recently publicized mortgage broker abuses.
"Think about the financial aid officer who, in the worst case, is being given stock options to send a student to a particular lender," Garg said. "Think about all the recent abuses in the mortgage business where you had brokers [given incentives] to have borrowers take out a higher interest-rate loan with higher fees because they were being paid more. I do not think we have fully not recognized the similarities between the two."
MRU Holdings does not pay close attention to how its competitors are operating, preferring to perfect its analytics and support its core mission, company officials said.
The student lending industry is such a large and growing market that MRU Holdings might not have to capture a lot of market share to generate above-average growth and returns. By Roth Capital's calculations the company could very well well hold a 4% share of the overall student lending market by 2012, Eckert said.
"We do not consider that a big leap of faith," he said.
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