Sallie Mae Straight Talk Conference Call (November 19, 2008)

For those, who missed the Sallie Mae Straight Talk Call today, I have documented most of the call below (I would certainly not call it an official transcript but I have done my best to capture the essence of the call)  If you are interested in listening to the replay, the number is 800-642-1687 and the Code is 73785847.  I found two points particularly noteworthy about the call:

• While much of the call was focused on the health and long-term viability of FFELP, it felt like the elephant in the room, namely the financial health of Sallie Mae, was not addressed at all.  Perhaps this was not the appropriate setting to discuss these matters, but volatile Mr. Market seems concerned about Sallie Mae at the present time (as it is with many financials):
  • The stock price closed at $5.81 today; which is down 46% from its closing price on 10/31 of $10.67 (The S&P 500 is down 16.5% and XLF, index of financials, is down 32.2% over that same period). 
    
    • Clearly some of this sell-off in SLM can be attributed to the ongoing crisis in the financial system, but there are specific investor concerns tied to SLM's need to roll over what is now a $28 billion Asset-Backed Commercial Paper (ABCP) facility by the end of February 2009.  
      • I suspect that they will provide more guidance in their upcoming investor presentation on December 2nd.  It would be useful to know, for example, how much the recently announced conduit would assist them in reducing their financing needs in their ABCP facility.  
        • The stock price has continued to fall since the November 8th announcement of the conduit so either investors are not paying attention or they don't believe it solves SLM's financing issues. 
    • Investors are also concerned about the capacity of SLM to increase private student loan volume given their recent announcement to curb its growth through increased underwriting standards. 

• In terms of new information, I found the discussion of the new conduit to be insightful as it was suggested that this may become a longer-term solution for the financing of the FFELP program (I had focused on its ability to take 2003-2008 unconsolidated FFELP loans off the books of the FFELP lenders).  I have highlighted that section in the transcript below. 
  
  • On the issue of loan servicing, SLM and other FFEL lenders would retain servicing rights in the conduit facility recently proposed by Paulson and Spellings. 
    
    • In addition, lenders that have used the Department's Loan Purchase and Participation Agreement programs would have the option to move the loans into the new term funding facility and pay off the government's interest while maintaining servicing with the originating lender. 
    • Goal is to have conduit up and running in 10-12 weeks which seems ambitious given the upcoming change in Administrations. 

Call participants for Sallie Mae:

• Tom Joyce, Senior VP of Corporate Communications
• Jack Remondi, Vice-Chairman CFO
• Barry Feierstein, EVP for Sales and Marketing

Purpose of Straight Talk forums

• Opportunity to hear directly from senior executives; listen to issues primary in your mind
• Provide reliable up to the minute  information on student loan industry

Dramatic changes have occurred since last call

• Disruption in capital markets
• New president Administration coming to Washington in January
• Stories about impact of various events on student loans

Barry Feierstein comments, EVP for Sales and Marketing

• Many challenges within school community
  
  • Budget pressures
  • State budget shortfalls,
  • Directly affected by credit crunch, accessing critical short term funding for day to day operations
  • Implementing recent legislative changes which has increased reporting requirements
  • Dealing with $3.4 billion shortfall in Pell Program and proposal to increase maximum award by $500

• Goal of call:  to set the record straight and clear the air, lots of rumor and noise in current environment.

• Important to have call to emphasize one key point:  one thing you do not need to worry about is access to Federal student loans under the FFELP program.
  
  • We have funding and operating capacity to serve the growing financing needs of your
  • "Sallie Mae stands ready to make every FFELP loan to every student at every school in this country - no exceptions"

• Address some of noise; lots of letters and commentary about schools signing up for or considering or shifting from the FFELP program to Direct Lending program
  • This is not going to be call about FFELP vs. DL
    • Both programs are stable and successful
    • Both have strong bipartisan congressional support
    • Both have strengths
  • A choice to shift from FFELP to DIRECT should always be based on merits of the program for your institution and not based on false premise that FFELP is not stable
  • FFELP lenders have unlimited access to funding directly from the U.S. Treasury, the same source of funding that powers the DL program and there are thousands of lenders in the FFELP program
  • Solutions that have been implemented are a guarantee that every student who needs a loan will get one
  • There can be no doubt that access to FFELP loans is assured;
  • Despite credit market conditions, remains largest source of financial aid
  • Unique public/private partnership that has worked extremely well

• Why has it worked well?
  • Competition and consumer choice are hallmarks of program
  • Consumer and school choice demands that Sallie Mae and other lenders continually make significant  investments to improve products and services
    
    • College saving and planning
    • Easy on-line processing
    • Lifetime loan servicing
    • Financial literacy and default management
  • Recent regulations on preferred lender lists designed to maximize consumer choice
    • Provides schools with ability to control process and criteria in selecting service providers
  • Unmatched customized default prevention and financial literacy programs
    • Superior programs will protect many borrowers from late payments and defaults
  • Reach out to FFELP lenders and guarantee agencies and ask them to provide with concrete evidence of impact that default management and prevention activities
  • Structure of FFELP prompts philanthropy and expands college access
    • Lenders, state agencies and guarantors all give back to communities through scholarships and free outreach education services.

• Conclusion:  Benefits widely recognized and what is driving overwhelming bipartisan support in Congress for maintaining two viable, competitive federal student loan programs. 

Jack Remondi comments, Vice-Chair and CFO

• Overwhelming bipartisan support in Congress for FFELP and DIRECT program
  • Miller and Kennedy acted in decisive and comprehensive manner to prevent college access crisis
    
    • ECASLA - ensured that every student and every parent needing a federal loan, got one.
    • Extended important law for an additional year 6 months before expiration
  • By acting proactively, Congress gave Secy. Spellings a comprehensive set of options to ensure students would not forgo college
  • Programs are working very well

• Secy. of Treasury Paulson and Federal Reserve Chairman Bernanke were questioned why lenders were taking TARP dollars but not making loans to American taxpayers.
  
  • No one questioning support for federal student loans:  Every dollar of support has been used to make new loans, solutions were implemented at a savings to the

• Sallie Mae will make over $20 billion in FFELP loans this year
  
  • Total FFELP volume is up this year:  $42 billion in FFELP volume originated vs. $39 billion in the same period last year
  • Funding capacity is unlimited; comes from U.S. Treasury

• Government goals in FFELP which they have delivered on all fronts
  
  • Ensure availability of federal student loans for 2008-09 and 2009-2010
  • Maintain public/private partnership
  • Protect taxpayer interest
  • Provide liquidity and support needed to stabilize student loan marketplace

• November 8th - Spellings and Paulson announcement
  
  • Extend for another academic year the successful loan purchase and participation interests program
  • Government will support one or more private sector funded facilities to provide longer-term financing solutions to FFELP
    
    • Provide long-term solution
    • Avoid relying on direct federal funding
    • Framework for permanent FFELP structure
    • Reduce cost of program to taxpayers
  • Solution is designed to get investors to better value the existing government guarantee that exists on every federal student loan
  • Working hard alongside other lenders to get this program in the next 10-12 weeks
  • Intended benefit for minimum of five years:  Lenders that use financing vehicle will maintain responsibility for loan servicing

• Initial loan purchase and participation designed to allow lenders to wait until end of award year to determine whether necessary to sell loans to government
  • Expectation that lenders would be able to refinance loan purchase agreement and avoid selling the loans.
  • Lenders that have used the Department's Loan Purchase and Participation Agreement programs the option to move the loans into the new term funding facility and pay off the government's interest while maintaining servicing with the originating lender.

• Private loans
  
  • Sallie Mae is continuing to make private loans to all applicants that meet their underwriting requirements
  • Changed underwriting requirements to reflect current economic conditions
    • Require co-signer on most loans have had impact on loan availability (expect unemployment to climb). 
      
      • Adding co-borrowers allows to minimize the impact of the significant increase in funding and expected credit costs making these loans more affordable for our borrowers.
  • Treasury Secretary Paulson in testimony to Senate Banking Committee
    • Looking for ways to address student loans as part of its broad plan to restore the health of the capital markets (no specific details)
    • Leadership demonstrated by NASFAA's letter to Paulson and Spellings on Monday which explained why the Administration should act to ensure a robust credit financing is available for private educational loans.  

Questions and Answer Session

Question #1:  Thought that President-Elect was a Direct Loan fan.  Do you anticipate any challenges there as a result of this new Administration?       

Remondi:  Everyone is looking for lower cost solutions to provide financial aid to students.  We have seen multiple times broad bipartisan support for competing programs that work.  Kennedy and Miller provided recognition that FFELP plays an important role in this process, alongside Direct Lending and that those programs should be operating as efficiently as they can.  The fact that they took that action with unanimous support from both parties.  The programs are operating well and meeting the need of students.  At this stage in the game it certainly looks like people are looking to keep the programs, not to make any radical changes here, but to go with what works.  Inthe past, Obama's plan was somewhat based on cost structure of FFELP pre-CCRA, which took out $20 billion worth of costs in the FFELP program, a lot of program plank issues are no longer valid.  I think there is a broad recognition of that."

Question #2:  Purchase and participation agreements, are the lenders required to sell loans back to the government or is it solely based on the market?

Remondi:  Not a requirement but an option.  If lenders can refinance loans in another vehicle they would retain the assets, if not, they would need to be put to the Dept. of Education in that process.  The program was designed with the hope that no one would have to put loans.  Back in May, it was expected that by September of 2009 that the put would be irrelevant.   As the crisis continues here that something that may need to be revisited. 

Question #3:  Technology support that Sallie Mae has.  Sallie Mae is our number one lender. Concerned that they would be forced in switching over to Direct Lending because it does not appear that we have a good software program from FFELP that will handle our processing with changeover in our software. 

Feierstein::  First time that I have heard of such an issue.  ELM and OpenNet and some of guarantors have loan processing and origination platforms that are available.  Processed well over $20 billion.  Take this off-line to resolve any issues that you might have. 

Question #4:  Need for a co-signer for federal guaranteed student loans?

Feierstein::  Sallie Mae does not require a co-signer but it is harder to get a loan without a co-signer.  Can offer a lower rate with a co-signer so it is in everyone's best interest.  Odds of getting a loan from any lender are enhanced with a co-signer, more affordable loan and increases chances of being approved? 

Question #5:  How quickly could the Department of Education making any sort of changes in regards to Direct Lending vs. FFELP?  Would it be months on end or is it something that they could decide really quickly and we are all left scrambling at the last minute as we approach 2009-10 school year?

Feierstein:  No one wants scrambling.  Last year we had unintentional scrambling driven by the credit crunch.  No one anticipated that we would be sitting here in November with credit markets frozne more now then.  Asking for a political prediction.  Think that Dept. of Education have far bigger fish to fry right now then to start to make changes to loan program that is working smoothly.  My view is that we are not going to see any change and that the bipartisan support, renewal of this construct, the commitment to put in place one of these private backed conduits to finance loans, to consider a long-term solution.  Don't really believe that there will be any significant changes for 2009-10 academic year; stabilty and predictability will drive actions of new folks in Dept. of Education. 

When you get into issue of budget scoring, fact that government is now providing financing to the FFELP program, it changes the equation.  There is an income stream on the financing, borrows at one rate and lends to FFELP lenders at another rate.  Our hope is that we are going to have stability as far as we can see into the future. 

Question #6:   Will Sallie Mae not sell loans to Dept. of Education and you will maintain servicing?

Remondi:  As long as any FFELP lender retains an economic interest in the loan, they have a right to continue servicing that loans.  Service loans while they are financed in participation agreement and we would service those loans if they were funded through this long-term funding solution that we are working on.  Servicing becomes an open issue if lenders choose to put loans to the Dept. of Education.  They are committeed to issuing an RFP for servicing of loans; we are eagerly waiting for that.  We are largest student loan servicer and have lowest cost structure.  Not splitting borrower's loans is a positive. 

Question #7:  No one has been denied a loan. What does that phrase mean?

Feierstein:  Specific to federal loan program.  Every student who applied for a Stafford loan received one.  Anyone who applied for one received one.  Private student loans a different animal.  Becasue of economy, all lenders have tighetened underwriting standards.  Price has also gone up; no different from applying for auto, home mortgage or what is happening in credit card markets. 

Question #8:  Parents are extremely confused about the federally backed vs. private, alternative loan programs.  Very confused that the whole thing has gone down the tubes.  What are you doing to increase understanding?

Joyce:  Lots of stories out there that have raised alarms for students and parents that question availability of student loans.  Generally, you see a lot of confusion in mixing up federal and private loans.  We are doing all we can to help educate parents, students and talk to the media everyday.  A lot of bad news in the economy and that gets alot of attention. 

Feierstein:  Tried 1-2-3 message.  Free money first, federal loans second, private loans third to make that distinction.  Frustrated by media talking about people who are denied or not eligible for federal Stafford loans.  Sallie Mae will be trying to invest resources and helping upstream to educate students and families before they set foot on your campus.  Education Investment Planner.  Cannot get a loan through it.  Will be adding more modules on top of that.  Shame on all of us for having to still deal with this today.