Joining the call about 30 minutes late:
Jack Remondi (Vice-Chair and CFO) is finishing up the specifics of their earnings announcement.
Describing the SLM proposal for how federal loans should be administered in the future:
- Choice in origination platform
- Create competion to enhance service and lower cost to taxpayers
- Servicers should have skin in game when it comes to collecting on loans
- Reduce implementation risk of having 75% of schools switch to new DL platform
Savings in CBO estimates are driven by Department acting as Bank offering fixed rate 6.8 to 8.5% loans while using low-cost federal financing, not lender subsidies
Final RFP put out by Department to cover servicing of loans to be put to the Department; expect contracts to be awarded in early June; confident that we will be selected.
Difficult to provide updated guidance given CP/LIBOR spread issue and other uncertainties.
Q&A
Question: What losses on private loan portfolio look like over next few quarters?
Expect higher overall charge-offs, $1.9 billion is current size of the allowance or an average of $240 million/quarter over next 8 quarters, expect it to be more heavily loaded in 2009 vs. 2010 driven by economic conditions.
Question: Describe all-in funding costs for recent securitizations? Did they have a positive spread?
Average was 240bp over LIBOR; funded at a loss; more concerned about liquidity and ability to fund over life of the loans; refinancing previously securitized student loans and repackaging them; appetite to do more like this is limited.
Question: Run-off value; somewhere in teens, do you have firm value of run-off value?
Have a firm view of what this business is worth; substantially more than what the stock is trading; in the teens.
Question: Given choice of business models, which would you prefer?
- Business model 1: originate, service, keep them on their books
- Business model 2: originate, service, government keep them on their books
Have to look at environment that you are operating in; government has dramatically reduced margins available in federal loans through CCRA; credit spreads to finance FFELP are at 225bp not 10bp and that funding is scarce. The fee for service model for FFELP assets is more desirable business model in this environment; SLM operates at lowest cost and offer better services. SLM also substantially better on collection side; defaults are on average 30% lower across all school types and that trend is consistent over multi-year time frame.
Question: Debt in market selling at prices that generate yields close to 20%. Do you intend to be active in buying back that debt?
Don't disagree that debt is trading at ridiculous; where we have availability we have been active in the market at buying back our debt.
Question: Become originator/servicer, what kind of earnings power will this corporation have in 3-4 years?
Confident that even in servicing mode, we can drive higher stock price. No one in the building is not a capitalist. Modeled out many scenarios and very confident; beleaguerred by CP/LIBOR issue; short-term liquidity issues very close to resolution; reached a point where we have to go up. We will push on.
Question: Is the surge in delinquencies tied to forbearance decreases?
Significant factor here; stopped [changed forbearance policy] at end of third quarter; Optimistic; on cash collections side, we are looking for borrowers to demonstrate a willingness and ability to pay before they are granted a forbearance. If we can get three full payents, then we would grant them a forbearance and make them current.
Forbearance has come down a $1.5 billion; only benign collection treatment a year ago; now they must show an ability to make payments. That is why we see chargeoffs and delinquencies rising; seeing lower numbers in earlier delinquency buckets.
Expect "heavy duty chargeoffs" over the next 4 quarters. Yet even at the current levels, on the traditional side, the private loan asset is significantly outperforming credit cards, cars, HELOC and even prime mortgages.
Question: Do you anticipate putting $13 billion back to government by September? If so, what cash will this generate?
Cash freed up will be: 1% origination fee + $75/loan; assume that these loans will be put.
Question: You mentioned that you expect the ABCP facility to be extended; discuss your ability to reduce that facility over time and whether you will eliminate private loans being financed in that facility?
Yes, the rationale for $1.5 billion private loan facility (completed in January) was to reduce financing private loans in that facility. We are reducing federal loan component side also through recent securiitizations [$5.1 billion over last month]. With the facility, we will include incentives to step down the facility's size over time; without requirement to step down. This issue has been Hanging over stock; impacts how debt trades; hope to reduce further through Straight A [conduit].
Question: How to think about private credit loans in future? Profitability over the longer term?
Think business is attractive; but we are pulling back; very attractive returns on ROA, or ROI basis;
Target to generate pre-tax margins of 4%; hitting those numbers on new originations; chargeoffs were 2.2%, 1.5% with co-signers, with 90% of new loans having a co-signer, this will help. Can generate 20% ROE.
Question: Democratic bias towards Direct Lending. What sort of reception are you getting from Congress?
Goal here is to create savings to fund Pell Grants; forget how you get to the savings; if they can be achieved; greater certainty, better product for schools and students; people need to recognize CBO savings figure comes from using federal balance sheet.
Predispostion to give Obama what he wants. We believe he wants Pell Grant savings. Receptivity to some of these ideas. ECASLA is basic model to generate savings. Reception has improved particularly in recent weeks.
Question: Is the ABCP facility extension going to be another several month extension?
No, it is a 364 day extension.
Question: What is timeline for an update on servicing contract and business there?
RFP just came out this week [See SLA post here]; expect to hear sometime in early-mid June; 6 companies bidding on that.
Question: Response to Sallie Mae's alternative federal student loan plan? From school's perspective, what is feeling they are getting from them?
Schools have been far more supportive than expected; like the idea of having a choice; DL program had gotten to 1/3 of market share in mid to late 90s, had declined to 18% a year ago.
Has not fared well with private schools; 18% of schools had chosen DL as of a year ago. I have noticed that they do grow weary of being part of a political process. That is the world we live in.
Question: With the DOE Conduit, how quickly can that be phased in? What costs do you anticipate?
Will not be the only user of that facility. Everybody has been conservative on how fast the program can grow based on investor demand. Assumptions are far lower than what investor demand looks like it will be. Until you officially launch product, don't want to make too aggressive assumptions.
Question: Guidelines to cost of conduit?
Trade like CP, expect it to be far lower in cost (at lest 100bp), far lower advance rates, less collateral required.
Question: How good is customer uptake to new private loan product [SLM introduced Smart Option Loan in March]?
Demand is very seasonal. Reception has been strong; small segment; have to see what happens; peak in June/July timeframe, so far very happy with reception received.
Question: In your supplemental you mention$16 billion eligible for conduit program; $17.4 billion available for TALF. Are these additive?
Yes, combine the numbers. Our current ABCP facility funds both DOE eligible and TALF-eligible
Question: CP/LIBOR fix? Confidence in getting that resolved, will it be retroactive?
Hard to comment; need legislative fix to this; working aggressively towards this; this is not only a FFEL lender isssue but also ABS holder issue, level of interest in getting this fixed has been elevated over the past week.
Question: July 2010, $3.3 billion of debt maturing; cash flows through 2010?
With existing cash flows and changes in advance rates, cash flows are in excess of debt service requirements. Won't be caught short in any specific quarter.
Quantify the total liquidity tied to rating triggers? If there is a rating downgrade,
No triggers for liquidity issues tied to ratings downgrade.
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