What are some additional details on the private loan portfolio that Discover is purchasing from Citibank?
Terms of the deal: "We plan to acquire The Student Loan Corporation for $600 million or $30 per share, subject to a post closing adjustment pay between Citi and Discover. Immediately prior to the closing of Discover’s transaction, SLC will sell $28 billion of assets to Sallie Mae and $9 billion of assets to Citibank. We will then acquire $4.2 billion of private student loans and related assets at an 8.5% discount, along with assuming $3.4 billion of SLC’s existing asset-backed securitization debt funding against these private loans. We expect to receive approximately $150 million from Citibank under the purchase price adjustment agreement. The ABS funding has had attractive rates and maturities represented by the trust identified in our 8-K. So funding is largely in place."
CEO Al Lord talked down SLM's private student loan forecast to $2.25 billion for 2010, which is 36% below the company's forecast just six months ago. From March 2010 Citi Investor Conference of this year: "Our volume goal is $3.5 billion for 2010; that is not in the bag. Goal would be to get that number to $5.0 by 2012-13."
If Sallie Mae hits their forecast, their last two quarters of 2010 would be 7% below 2009 levels despite significant marketing spend on their Smart Option loan and a reduced $25 per month payment option they introduced in June of this year. Sallie Mae is the only major lender that requires borrowers to make payments while they are still enrolled in school. Let's see if there are any additional product modifications upcoming to try and address this ongoing slide.
Company forecast likely loan growth for 2011 of 10-11%. Sallie Mae's private loan originations have dropped by more than 24% in each of the last nine quarters. Their projected private loan volumes for 2010 of $2.25 billion are 71.5% below their peak levels of $7.9 billion in 2007.
Company's research indicated that tuitions rose 4% (after two relatively flat years) on a base of $300 billion or $12 billion incremental costs for students for 2010-11.
Going forward, "company will invest modestly and intelligently to resuscitate its private credit business..."
"Discover Financial Services (NYSE:DFS) today announced that it has reached an agreement to acquire The Student Loan Corporation (“SLC”) for $600 million, or $30 per share. Separately and immediately prior to the closing of Discover’s transaction, SLC will sell $28 billion of assets to Sallie Mae and $9 billion of assets to Citibank. Discover will acquire $4.2 billion of private student loans and related assets at an 8.5% discount, along with $3.4 billion of SLC’s existing asset-backed securitization debt funding. The amount to be paid by Discover for the private student loan assets is subject to a post-closing purchase price adjustment between Discover and Citibank, which owns 80% of SLC’s outstanding common stock.
