Date post: | 02-Jan-2016 |
Category: |
Documents |
Upload: | shay-farmer |
View: | 37 times |
Download: | 0 times |
NCHELP Spring ConferenceJune 8, 2010
Is There Life After FFELP?
Mark Weadick
Managing Director
Student Loan Capital Strategies LLC
Student Loan Sector: Significant Dislocation
2
• Both Legislation and Credit Crisis have had major impact
• College Opportunity & Affordability Act passed in 2007– Significantly reduced economics of all FFELP originations– Consolidation loans became uneconomic
• ABS market access and economics impacted since August 2007
• Health Care Bill eliminates FFELP lending July 1, 2010
• Industry concentration has increased due to exit of many players
• Private loan originations have fallen by approximately 50%
Student Loans are Major Component of Student Aid
________________________________________________Source: CollegeBoard. Figures include both undergraduate and graduate student aid.
$47.4 $49.5 $51.6 $57.5 $61.8
$14.2 $13.8 $12.9$13.8
$20.7$18.1 $21.2 $24.0$25.4
$13.3$21.4$20.5 $20.6
$22.3 $24.8$7.7 $7.7$8.2
$8.4 $8.5$35.0$37.5
$39.6
$42.2 $43.1$8.3$8.2
$8.1
$8.1 $8.0
$0
$40
$80
$120
$160
$200
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
FFELP Loans Direct Loans Other Loans Federal GrantsState Grants Other Grants Work-Study & Tax Benefits
$152.1$158.4
$164.9$177.8 $180.3
+7%
4-YearCAGR
+10%
(7%)
+4%
+3%
+5%
(1%)
Sources of Student Aid
($ in billions)
3
Federal Government will Lend $90B Annually
________________________________________________Source: CollegeBoard. Figures include both undergraduate and graduate student aid.
$61.4$54.8 $58.0
$69.1
$84.0$0.8
$1.1$1.4
$1.4
$0.9
$16.0$13.0
$19.0
$21.1
$11.0
0
25
50
75
$100
04-05 05-06 06-07 07-08 08-09
Total Federal Loans State Sponsored Non-Federal Loans P rivate Sector Non-Federal Loans
$68.6 $75.1
$81.8
$91.6 $95.9
($ in billions)
Sources of Student Loans
CAGRPrivate Loans (4.1%)Government Loans 11.2Total 8.7%
4
Jan 06 Sep 06 Jun 07 Feb 08 Nov 08 Jul 09 Apr 100
25
50
75
100
125
150
175
200
225
250
275
SLM Corp. Student Loan Corp. Nelnet Inc. First Marblehead Corp.
Relative Stock Price PerformancePrice Performance of Student Lenders
(52.8%)
(82.8%)(76.3%)
(87.7%)
11/7/06:Congressional
elections
4/15/07:Flowers / SLMannouncement
11/15/07:College Opportunity & Affordability Act
passed
1/25/08:Formal termination of JC Flowers / SLM
8/6/09:$1.4bn STU
TALF securitization
________________________________________________Source: FactSet, Capital IQ and press releases. Market data as of April 12, 2010.
4/7/08:The Education Resources Institute (TERI) bankruptcy filing
5/7/09:$2.6bn SLM
TALF securitization
1/29/10:STU announces restructuring of
Citi Omnibus Credit Facility
3/22/10:Reconciliation passes which
eliminates FFELP
Stock Price PerformanceYTD 1 Year 2 Year
SLM 15.7% 106.3% (26.9%)STU (22.9) (34.5) (62.3)NNI 11.4 92.6 56.5FMD 26.8 5.1 (30.8)
5
0.0
5.0
10.0
15.0
20.0
25.0x
J an 06 Sep 06 J un 07 Feb 08 Nov 08 J ul 09 Apr 10
SLM NNI FMD
0.00
3.00
6.00
9.00
12.00x
J an 06 Sep 06 J un 07 Feb 08 Nov 08 J ul 09 Apr 10SLM STU NNI FMD
Valuation Perspectives
Price / Tangible Book Value
Forward P/E (NTM) (1)
0.44x
1.63x
2.37x
0.91x
Averages6M 1YR 2YR 3YR
SLM 2.22x 1.93x 2.55x 4.00xSTU 0.57x 0.56x 0.86x 1.33xNNI 1.65x 1.51x 1.71x 2.39xFMD 0.63x 0.46x 0.60x 1.90x
________________________________________________Source: Capital IQ. Consensus estimates per Reuters. Market data as of April 12, 2010.(1) FMD earnings estimates no longer tracked by research analysts after August 2008. No research analyst coverage or earnings estimates available for STU.
Averages6M 1YR 2YR 3YR
SLM 8.20x 7.22x 8.34x 10.27xNNI 6.58x 6.75x 7.76x 8.67xFMD NA NA 6.61x 8.74x
7.9x8.4x
Valuations have fallen dramatically due to reduced government subsidies and concerns about funding access and cost
6
$70 $67 $54 $68 $67$100
$59 $44
$89$76
$67$85 $82
$74
$36 $59
$151$229
$425
$460 $484
$217
$28
$43
$48
$63$67
$61$47
$58
$77$54
$58
$6$4$28 $21
$36
$12 $18
$374
$462
$652
$754 $754
$510
$139 $146
2002 2003 2004 2005 2006 2007 2008 2009
Credit Cards Auto Home Equity Student Loans Other
ABS Markets Have Shrunk Dramatically
Source: Thomson Reuters Bloomberg, SIFMA.(1) Primarily includes commercial finance loans, CLOs, equipment leases, aircraft leases, manufactured housing, and timeshare loans.
($ in billions)
(1)
Student Loan ABS Total ABS Market (ex-TALF)
2002 2003 2004 2005 2006 2007 2008 2009
Term Floating Auction Rate TALF
$38
$49
$60
$84
$79
$29 $28
$73
7
FFELP ABS Spreads
Bond Average Life 1 Year 3 Years 5 Years 7 Years 10 Years
Pre Credit Crunch -3 -1 3 8 15
February 2009 150 195 225 240 NAApril 2009 125 160 190 215 NAJune 2009 80 115 135 155 NAMay 2010 40 65 80 95 NAJune 2010 45 70 85 100 NA
Tax-ExemptJune 2010 40 65 75 95
Student Loan ABS SpreadsInterest Cost of Bonds Backed by Student Loans
Interest Cost Expressed as a Spread (bps) to 3-Month LIBOR
» FFELP ABS spreads have tightened dramatically since the credit crunch though still elevated
» Recent European turmoil has caused some widening of spreads
» A new tax-exempt LFRN market brings attractive financing costs and financing for long duration assets
8
Federal Student Loan Market Size
Lender Name FY09 % TotalSLM Corporation $154,142 36.6%Citibank, Student Loan Corp. $32,474 7.7%Wells Fargo/Wachovia $27,810 6.6%Nelnet $25,256 6.0%Brazos Group $13,048 3.1%PA Higher Ed. Asst. Auth. (PHEAA) $11,126 2.6%JP Morgan Chase Bank $11,100 2.6%Bank of America $10,067 2.4%College Loan Corp. $9,659 2.3%CIT/Student Loan Xpress $9,629 2.3%
Top 10 Holders $304,311 72.2%
Remaining Holders $117,019 27.8%
Source: US Department of Education, Federal Budget Request 2011, as of 9/30/09
9
Outstanding Federal Student Loans: Total $653 B Top 10 Holders of FFELP Loans
Who holds Student Loan Collateral?
Loan Programs: $750 B Funding Source: $750 B
Private, $100 B
Direct, $150 B
FFELP, $420 B
FFELP - DOE Owned, $80
B
Balance Sheet, $80 B
FRN, $275 B
Govt., $230 B
Warehouse Borrowing, $40 B
Munis, $30 B
Straight-A Funding CP, $25 B ARS, $70 B
Dollars in Billions, SLCS estimates as of September 30, 2009
10
Federal Loan Market Takeaways?
• Pace of Industry consolidation will quicken– Several businesses and portfolios are for sale
– High levels of “stuck” collateral on BSs and in “busted” financings
– How many states/nonprofits will liquidate or wind down?
• Federal Loan servicing – 5 primary federal servicers; ACS, Great Lakes, Nelnet, PHEAA and SLM
– Reconciliation: nonprofit’s may service up to 100,000 DL accounts
– Overall service levels expected to decline
– While legacy FFELP systems be supported?
• Keys to future FFELP/DL success– Access to capital , e.g. deposit funding
– Scale & Integrated business model
11
0
2
4
6
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Not-for-profit For-profit
Student Enrollment Trends
Projected Total Enrollment
For-profit education has grown rapidly over the past 10 years and is expected to outpace traditional not-for profit growth – for-profit enrollment estimated to reach over 2 million by fall of 2013
Full-Time vs. Part-Time
Private: Not-For-Profit vs. For-Profit Over-25 vs. Under-25
20.620.4
20.320.119.9
19.719.519.319.1
18.217.5
17.8
18.7 19.0
14
16
18
20
22
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(Students in millions) (Students in millions)
(Students in millions)(Students in millions)
Source: College Board, US Department of Education and Wall Street Research.
CAGR: 0.9%
0
5
10
15
20
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Full-time Part-time
Part-TimeCAGR: 1.27%
Full-TimeCAGR: 1.74%
0
5
10
15
20
25
1980 1990 1995 2000 2001 2002 2003 2004 2005 2006 2008E 2012E 2017E
Under 25 Over 25
63%
59%
37%
41%
61%
39%
58% 57% 61% 62% 61% 63% 61% 61% 61% 61%
42% 43% 39% 38% 39% 37% 39% 39% 39%
39%
Under-25CAGR: 1.23%
Over-25CAGR: 1.61%
Not-For-ProfitCAGR: 1.29%
For-ProfitCAGR: 9.14%
CAGR: 2.3%
12
$9,528
$4,470
NA
$19,047
$9,396$10,030
0
5,000
10,000
15,000
$20,000
> 2-year 2-year 4-year
1995-1996 2007-2008
$2,492
$1,525
$2,802
$5,328
$2,749
$5,730
1,000
2,000
3,000
4,000
5,000
6,000
$7,000
> 2-year 2-year 4-year
1995-1996 2007-2008
$7,185
$3,517$2,868
$13,595
$5,914$5,757
0
5,000
10,000
$15,000
> 2-year 2-year 4-year
1995-1996 2007-2008
Tuition Pricing TrendsFor-profit tuition increases have been significant and have tracked broader education trends
In-State Out-of-State
Private: Not-for-Profit Private: for-Profit
CAGR: 6.5%
CAGR: 5.0%
CAGR: 6.1%
CAGR: 6.0%
CAGR: 4.4%
CAGR: 5.5%
CAGR: 6.4%
CAGR: 5.9%
Source: US Department of Education and Wall Street Research.
$7,412$6,727
NA
$14,908
$12,357$12,305
0
5,000
10,000
15,000
$20,000
> 2-year 2-year 4-year
1995-1996 2007-2008
CAGR: 5.2%
CAGR: 6.0%
13
The Need for Private Loans Remains High
$22,790
$26,273
$5,830$7,020
$14,174
$5,500$6,500
$7,500 $7,500
$5,350
Average Cost of Private Not-for-Profit
4-Year
Average Cost of Private
For-Profit 4-Year
Average Cost of Public 4-Year
Freshman Sophomore Junior Senior Annual Maximum
________________________________________________Source: CollegeBoard and Wall Street research.
Funding
Undergraduate Stafford Loan Limits Pell Grants
Tuition and Fees
2004-2005 school year
2009-2010 school yearGrowth: 15%
CAGR: 3%
Growth: 20%
CAGR: 4%
14
Student Borrow ing
23%
Parent Borrow ing
16%
Post-secondary Education Funding SourcesOver 50% of post-secondary education is funded through grants and loans
Average American Family
Parent Contributions from Borrowed Sources (16%) Student Contributions from Borrowed Sources (23%)
Source: Sallie Mae and Gallup.
Parent Income / Savings
33%
Student Income / Savings
10%Grants /
Scholarships15%
Friends / Relatives
3%
Federal PLUS Loan33%
Other Loans26%
Retirement Account
3%
Home Equity Loan19%
Credit Card6%
Federal Student Loan
52%
Other Loans22%
Credit Card4%
Private Education
Loan13%
Private Education
Loan22%
15
Private Loan Market Overview
Dynamics Size of Market (1)
Key Players Today
» Only a handful of institutions are originating loans » Non-TALF ABS market is very challenged:
• Long-tail nature of assets • Unsecured• Limited performance data• Poor performance history
» Lack of competition is facilitating lender friendly terms
• Higher FICO scores• Co-borrowers required• LIBOR+8 to10 pricing• More ABS friendly terms likely over time
» Loans are currently non-dischargeable in bankruptcy, there is an active political debate on this topic
» Schools will remain the primary distribution channel due to certification issues and asset quality concerns
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
'95-'96 '96-'97 '97-'98 '98-'99 '99-'00 '00-'01 '01-'02 '02-'03 '03-'04 '04-'05 '05-'06 '06-'07 '07-'08 '08-'09
Loan Originations ($ in billions)
________________________________________________(1) Source: CollegeBoard.
CAGR (through ’07-’08): 2
4.5%
Credit Unions
16
Recent Private Loan SecuritizationsPrivate Loans
Municipal Private Loans
17
Issue Date Issue Size Structure Pool WAM AAA Bond WAL Weighted FRN Cost AAA Advance Rate TALFNCSLT 2007-1 3/8/2007 1,125,300,000 FRN 266 8.85 LIBOR+17 88.70% NoSLM PCSLT 2007-A 3/29/2007 2,239,306,000 FRN/ARS 213 8.25 LIBOR+14 95.20% NoNCSLT 2007-2 6/14/2007 1,041,000,000 FRN 263 8.74 LIBOR+26 89.90% NoNCSLT 2007-4 9/20/2007 1,464,000,000 FRN/ARS 269 10.26 LIBOR+78 91.60% No
SLM PELT 2009-A 3/12/2009 1,497,815,000 FRN 202 NA LIBOR+601 47.00% NoSLM PELT 2009-B 5/12/2009 2,592,594,000 FRN 208 4.38 LIBOR+600 58.70% YesSLM PELT 2009-C 7/14/2009 1,108,728,000 FRN 207 3.92 Prime+125 60.10% YesSLC TRUST 2009-A 8/13/2009 1,396,000,000 FRN 250 7.49 Prime+150 55.70% YesSLM PELT 2009-D 8/13/2009 1,680,000,000 FRN 210 NA Prime+25 63.40% YesSLM PELT 2009-CT 12/10/2009 392,243,000 FRN 138 NA Prime-90 60.10% YesSLC TRUST 2010-A 2/12/2010 781,000,000 FRN 244 NA Prime+100 55.68% NoSLC TRUST 2010-BA1 3/11/2010 207,700,000 FRN 262 NA Prime+75 76.53% NoSLC TRUST 2010-BA2 3/11/2010 475,500,000 FRN 268 NA LIBOR+350 75.01% No
Issue Date Issue Size Structure Ratings (M/S/F) Starting Parity Credit EnhancementMELA 5/27/2009 210,000,000 Fixed Aa2/AAA/NR 101.66% Assured Gty, Moral Ob., OCHESAA 6/23/2009 450,000,000 Fixed NR/AA/A+ 103.85% Moral Ob., OCMEFA 6/30/2009 289,005,000 Fixed NR/AA/A 112.32% OCRISLA 7/7/2009 25,570,000 Fixed NR/A+/A 115.89% OCISLLC 11/24/2009 230,170,000 Fixed A1/A/NR 112.82% OCHESAA 1/26/2010 713,000,000 Fixed Aa2/AA/NR 109.73% Moral Ob., OCRISLA 3/31/2010 16,970,000 Fixed NR/A+/A 109.16% OC
Private Student Loan Market Takeaways
• $10B+ demand for private loans, with good growth potential
• Primary distribution channel will be school “certified”
• Lender “brand” will be increasingly important to borrowers
• Securitization markets for private loans will remain challenged– Long loan terms very difficult to finance
– Subordinate tranches very challenged
– Small market size and uneven performance data
– Paradoxically, municipal markets are open for state/nonprofit issuers
• As such, private market likely to become more concentrated– Market size will not support multiple players
– Lender “brand” and deposit funding are key attributes
18