Sallie Mae 2Q 2008 Conference Call Highlights

Sallie Mae (SLM) reported "core" earnings for the 2Q of 2008 which were down by 72% as compared to 2Q 2007. 

Here are some excerpts from the transcript of their conference call, which is provided by Seeking Alpha:

Securitization of FFELP assets increased in 2Q vs. 1Q but funding costs remain high:
"Through the first six months of 2008, we issued $11.8 billion in term FFELP asset backed securities, including $7.1 billion in the second quarter. The all in cost of this issuance in the quarter was 140 basis points over LIBOR...Since the close of the quarter, we securitized an additional $1.6 billion at an all in cost of 85 basis points over LIBOR."

SLM plans to take advantage of Department of Education Liquidity Plan to reduce reliance on securitization market:

"We will take advantage of the funding program provided by the department and this will allow us to reduce our reliance on our asset backed financing facility and ultimately replace it with a smaller and significantly less costly facility in the future."

Implemented more stringent lending standards for private loans leading to 24% drop in private loan originations for the 2Q:
"Consistent with our announcement in the first quarter that we were tightening our private lending standards including ceasing non-traditional lending completely, private education loan originations declined 24% to $891 million in the quarter."

SLM expects to have average yield of LIBOR + 8% on private loan portfolio and to originate about $7 billion in private loans. With LIBOR today between 2.5% and 2.8% (depending on term) that would translate into loans averaging 10.5%-10.8%.
In response to analyst's question, CFO Remondi indicated "I think the pricing ranges that you are referring to (LIBOR + say 800bp or so) are approximately right."

"....demand for liquidity to fund our business is going to be limited to our private credit portfolios which we would expect to originate about $7 billion in total this year."

SLM has seen delay in schools processing loans due to recent Stafford loan limit changes:
"In terms of application flows that we are seeing in to our centers today, historically July is one of our busiest months and it’s been much lighter than expected principally because of the increase in loan limits that took place in the schools needing to update their software and their financial aid management systems to accommodate that higher loan level increase so we’ve seen a number of schools who have been late in terms of processing applications."

SLM is focusing efforts on internal brands while reducing lender partner originations:
"As a result of these changes we’ve refocused our FFELP originations on our internal lending brands. Our loan volume here was up sharply increasing 44% to $1.9 billion. Our lender partner originations to offset these gains declining $618 million or 56%."

SLM hopes to re-enter securitization market for private loans, which has been closed (with exception of several smaller deals) for almost a year now:
"We also plan to reestablish our private credit term ABS program. And although market conditions remain difficult and volatile, we hope to re-establish this important source of funds in the near-term."

Long-term solution for FFELP lenders resides in restoring vibrant, lower cost securitization market which recognizes the guarantee behind these loans :
"So, coming up with some form of structure that creates a greater awareness or confidence or valuation of that guarantee by investors in student loan asset backed securities would probably be the best thing that could happen."