Sallie Mae executives said today during a conference call that plans to divide the company into two distinct businesses signals the next chapter for the student loan originator in a post- Federal Family Education Loan Program (FFLEP) environment.

Plans to spin-off its servicing and collection business into a separate business from its consumer banking company would create “the best platform for growth and value.”

All existing secured and unsecured debt will remain with the new company spinoff. Only recently originated private student loans will make up the portfolio of the second company, Sallie Mae Bank.

Sallie Mae Bank will start with total assets of under $10 billion. Its student loan portfolio will consist of only recent originations under SMART Options student loan origination program. The portfolio will be funded initially by deposits but over time will increasingly rely on the securitization market, for funding. Joe DePaulo, currently vice president of banking finance will lead the bank.

Sallie Mae said on the conference call that it separated its business this way because “its new private student loan originations under its SMART option program are more uniform in terms of credit underwriting.”

Sallie Mae Bank may also expand into other areas if unsecured consumer lending.

All of the outstanding unsecured, legacy debt of Sallie Mae today will become the obligation of Sallie Mae’s new education loan management company. Its key business will be the $120 billion of FFELP loan portfolio and the company’s $30 billion of non-bank owned, private education loan assets that are principally financed via the securitization market.

The new company will also incorporate Sallie Mae’s existing FFLEP servicing operations and its collection operation and its guarantor services business.

Jack Remondi, the current CEO at Sallie Mae, will lead the new company.  He said that the new company is looking acquire some of the $130 billion in outstanding FFLEP loans not currently owned by Sallie Mae.

Fitch Ratings downgraded the company’s default ratings to 'BB+/B' from 'BBB-/F3' and placed the ratings on Rating Watch Negative to reflect downside rating risks arising from the company's announcement.  

Fitch said in a press release today that “the proposed new structure incrementally weakens SLM's credit profile and the position of SLM's debtholders, as SLM would no longer benefit from the private loan origination and servicing businesses.”

The ratings agency also said that SLM's future strategy as a viable company remains uncertain. "At this point, management has identified certain areas of potential growth leveraging its collections expertise; however, concerns exist regarding execution risks," said Fitch.

However, analysts at Barclays think the proposed split would be neutral to mildly positive for Sallie Mae’s ABS. "Although the FFELP servicing business would no longer benefit from revenue generated through private credit student loan origination, it would be relieved of any current and forthcoming regulatory burdens associated with private credit student loans," the analysts said in research published today.

Sallie Mae started out in 1972 as a government sponsored entity and was fully privatized in the 1990’s. However the company's faced its biggest challenge has been the end of the FFLEP program in 2010. Since then, it has worked to improve the credit quality of its loan portfolio. 

“The separation creates a more optimal structure for the increasingly different regulatory environment the each of companies must operate under, in the future,” Remondi said on the conference call.



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