Bank of America, JPMorgan Chase and two private equity firms bagged big game when they agreed to buy out Sallie Mae Corp. last week for $25 billion. As the four stake-holding companies now divvy up the spoils of the company, which managed $142 billion in education loans last year, ABS professionals have quickly concluded that the company's securitization activity will increase, not decrease. Spreads on existing SLM paper were in no danger of widening, at least not by press time.
Still, securitization professionals are chewing over almost as many issues as Sallie Mae has ancillary businesses. The acquirers agreed that Bank of America and JPMorgan would each own a 24.9% stake in the company, and that the private equity firms would hold a 50.2% stake. How to handle Sallie Mae's debt management operations (DMO), through which it provides accounts receivable and collection services for student loans, credit cards and mortgages, is less certain, according to industry professionals. Sallie Mae has been servicing private student loans for almost 10 years, since long before securitization of those products took off, as one market participant observed.
"Whoever takes it over - will they keep the servicing intact? Those are the kinds of questions I'm asking," the source said.
The student lender's DMO business segment generated $157 million in net income by year-end 2006, a 16% increase over the previous year, according to its 2006 annual report.
Among other pursuits, Sallie Mae's DMO business purchases and manages portfolios of subperforming and nonperforming mortgages through a subsidiary called GRP Financial Services purchased two years ago. Most of the mortgages finance one-to-four-family properties. By year-end 2006, one year and four months after GRP's acquisition date in August 2005, Sallie Mae held $518 million in distressed mortgages, the company said.
True enough, both JPMorgan and Bank of America have consumer lending and credit card operations that should be able to encompass Sallie Mae's functions almost effortlessly, as one market participant put it. Whether they want the responsibility for the distressed mortgage acquisitions and servicing business, and if they did, how it would be divided between them are open questions.
"I don't think this unit would be a good fit with either Bank of America or JPMorgan," said one market observer, alluding to Sallie's mortgage assets. "On one hand, you have a company that is not predisposed favorably to anything subprime. In another case, you do have a party that is favorably disposed, but it is [already] highly proficient at it."
For its part, Bank of America essentially shut down and gave away its subprime lending business when it sold its Equicredit Corp. unit in 2001.
"It is unlikely that management would contemplate a movement into the subprime front," the observer said. "Their recent corporate history involved the closing of what was, at the time, the leading subprime lender."
Further, Bank of America has a thriving credit card business that already has a sound collection capacity. Exactly how would Sallie Mae's DMO unit complement Bank of America's thriving credit card business, some wonder. As for JPMorgan, it is already
a successful subprime lender through its Chase Manhattan Mortgage Corp. unit.
"JPMorgan Chase is a superbly managed and highly successful business and clearly could be extended to cover any needs in the student loan [and mortgage] space," said one market participant.
Regarding initial impressions of the buyout, securitization professionals do not expect to see much spread widening on existing Sallie Mae SLABS. This is largely because of "the appetite ABS investors have shown for SLM's recent issues and the high quality of the underlying FFELP and private student loan collateral," as analysts from Barclays Capital wrote last week.
Furthermore, no one expects its securitization program to drop off after the deal is finalized late this year. Industry professionals point to the fact that after the leveraged buyout was announced, Standard & Poor's put Sallie Mae's A' long-term counterparty credit rating and other related ratings on negative ratings watch. Moody's Investors Service also put them under review for a possible downgrade. Fitch Ratings cut the company's short-term issuer rating to F1' from F1+' and put the rest of its ratings on watch for possible downgrade. With diminished rating agency confidence in Sallie Mae's corporate debt, its future borrowings under that segment will likely become more expensive. That, industry sources say, will induce the company to rely more heavily on ABS as a means of financing.
Market sources say the buyout presents a probable loss of both lead manager and warehouse financing business for several banks, including ABN Amro, Citigroup Global Markets, Credit Suisse, Merrill Lynch and Wachovia. Although the education lender has earned a reputation as a demanding client, it is a lucrative account whose choice mandates are no longer up for grabs.While profitable co-manager opportunities still abound, it is a foregone conclusion in the ABS world that Banc of America Securities and JPMorgan Securities will get all of the lead manager mandates for the education lender's SLABS.
"The gravy train is over, man," he said. "Sallie Mae has two big mouths to feed now. You had better start knocking on Nelnet's door."
As of Dec. 31, 2006, Sallie Mae had $6.5 billion in five-year revolving facilities maturing in 2008, 2009 and 2010. Among other uses, the facility provides liquidity support for its commercial paper program, Sallie Mae said. Although the student lender never drew on those facilities, at least by the end of last year, the acquisition still represents a loss of business for the company's warehouse providers, say industry sources.
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