Sallie Mae is still interested in adding to its holdings of Federal Family Education Loan Program [FFELP] loans, even if it took a pass on a $3.6 billion portfolio that CIT sold to Nelnet this month.
“There are roughly $150 billion of FFELP out there that we don’t own or service, and we’d certainly be very interested in acquiring those loans, but we will approach the opportunity in disciplined way,” John (Jack) F. Remondi, the company’s president and chief executive, said today.
Remondi, who was speaking on a conference call following the release of Sallie Mae’s first-quarter financial results, noted that the asset class has a limited shelf life. The U.S. government stopped paying banks to originate guaranteed student loans at the end of 2010.
“You are buying a finite income generating portfolio,” the CEO said.
He added, “We certainly don’t need to acquire a loan portfolio to achieve economies of scale. The decisions that holders have to make are independent to each of those institutions we’ll stay in close contact with them.”
Late Wednesday, Nelnet disclosed in a regulatory filing that it had agreed to purchase from CIT the residual interests in a total of $2.6 billion of securitized student loans and related assets and approximately $950 million of unsecuritized student loans.
The aggregate purchase price for both the residuals and the amount to be paid over the par value of the loan portfolio and related accrued interest is $139 million, according to the filing.
Participants on the conference call described this price as favorable to the seller, CIT. One of them asked Remondi if it might encourage Sallie to be a seller, rather than a buyer, of FFELP-related assets.
“To the extent that market prices make it appropriate to be sellers, we certainly will take a look at that,” the CEO responded. However, “we believe that, ultimately we should be buyers, given our portfolio characteristics, funding capability and the performance that we can produce for our customers.”
He noted that the portfolio Nelnet acquired was serviced by a third party, which made it less attractive to Sallie Mae.
Another participant on the call asked if the strong pricing for this transaction had any implications for valuations of Sallie’s FFELP portfolio. At March 31, 2014, the company held $102.6 billion of FFELP loans, compared with $119.2 billion at March 31, 2013.
“Prices were very competitive,” Remondi replied. “We were interested in buying that portfolio, but we did not, let’s just leave it at that prices were higher than we thought appropriate.”
When pressed, however, he acknowledged that the sale price might imply a discount rate on Sallie’s cash flows that are “lower than what people on the sell side” assume.