In a move that has been expected for the past three years, Sallie Mae has completed its transition out of GSE status to become a non-government entity. The move was originally slated for completion in September 2008, but the hyperactive ABS market of the past few years enabled Sallie Mae to finish the job early.
In a market with seemingly endless demand for ABS, Sallie Mae was able to generate enough capital through securitization to repurchase $1.7 billion of its debt and retire its GSE charter. Analysts estimate Sallie Mae's ABS issuance to decline anywhere from $5 billion to $10 billion from its 2004 total of nearly $27 billion, but most market participants agree the effects of that decline will be relatively minimal.
"The decrease in supply is only going to increase demand for their paper and drive in spreads further," said Neil McPherson, head of the ABS syndicate desk for ABN AMRO. McPherson noted there is a significant amount of existing Sallie Mae paper in investor hands paying down this year, which will mean replacement demand will be high as well. "In comparison to Sallie Mae, Fannie Mae and Freddie Mac spreads look pretty rich," he added. McPherson said he expects to see little net change in the total amount of student loan ABS in 2005 as private loans gain popularity and other issuers step in to fill the gap.
"Since this has been in the works for the past three or four years, investors are prepared for it," said the head of research for an investment bank in New York. "The company's way of doing business is going to remain intact...and therefore the attractiveness of its paper is going to remain intact," he said. "Privatization only solidifies their place in this market. They are the cat's meow, the big player, they're it," he continued.
"Sallie Mae can continue to enter into broader and different businesses it was prohibited to enter into as a GSE, such as originating student loans, which it has been doing through its holding company since the Privatization Act was approved by shareholders in 1997," added Sharon Asch, director and head of student loan origination in the ABS group at ABN AMRO. Sallie Mae is expanding its non-guaranteed loan business, as well as its servicing of education loans, most recently through the purchase of Southwest Student Services Corp. It has also acquired a company that purchases charged-off debt and performs contingency collection work, according to Kathy Shanley, analyst with Gimme Credit, an independent research service on high-grade corporate bonds to institutional investors. Also Sallie Mae has recently purchased several student-loan originators, among them the Student Loan Finance Association.
As for the quality of Sallie Mae's securities, no one seems overly concerned. "The change in [Sallie Mae's] GSE status should have no adverse effect on its securitization quality," wrote Citigroup Global Market's ABS research team. "[Sallie Mae] does not rely exclusively on the ABS market for funding, but runs a well-diversified funding book. As well, the Department of Education conferred its exceptional performer status to Sallie Mae, making it eligible for 100% reinsurance instead of only 98%."
ABS analysts from UBS and Citigroup estimate Sallie Mae's 2005 issuance to fall within the $15 billion to $20 billion range.
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