With globalization and need for us to re-train, the education finance sector is a decent long-term play for good returns as the boomers and Gen-Z go to school in large numbers. FDLP alone cannot grow rapidly to make a dent on lenders like SLM or NNI from the space. The only political risk is that SAP gets squeezed and NIM for these companies gets hurt.
The other risk is that the yield curve becomes more inverted than it is now. In that event, every lender will be in trouble.
Going in to 2007, the student lenders are the most beaten down sector. All they need is a little positive news from Washington (on the 9.5% issue or a benign piece of "reform" legislation), and NNI can go to the high 30's.
There is also little downside in the long term at this valuation. With no inside knowledge on my part, NNI is a perfect fit for a big player like Citi.
Happy New Year. Resolution for Ben: don't raise rates. Resolution for Senator K: Don't think that Washington can finance student loans cheaper than the current system; it can't; save the taxpayers' money and look elsewhere for reform.
The link in my last e-mail expired. Here's edited text of the 8-k:
On December 22, 2006, Nelnet, Inc. issued a press release announcing that the Government of Canada has notified EDULINX Canada Corporation, a subsidiary of Nelnet, that the Government of Canada has decided to award a competitive contract to provide financial and related administrative services in support of the Canada and Integrated Student Loan Programs ("CSLP") upon the expiration of the current EDULINX contract for such services to another service provider.
Under its existing contract with the Government of Canada, EDULINX provides services for student borrowers attending public institutions. The Government of Canada is EDULINX's largest customer, and as previously disclosed, this contract is currently scheduled to expire on July 31, 2007 (the Government of Canada has the option to extend the existing contract to March 31, 2008). As a result of this decision, EDULINX will be required to transition the existing direct-financed CSLP portfolio it services to the selected service provider.
EDULINX's servicing revenue for the nine-months ended September 30, 2006 was $48.2 million (USD), of which $37.3 million (USD) was earned under the CSLP contract. For the nine-months ended September 30, 2006, EDULINX contributed $3.7 million (USD), or $0.07 per share, to Nelnet's consolidated net income earned under generally accepted accounting principles ("GAAP").
EDULINX contributed $4.3 million (USD), or $0.08 per share, to Nelnet's consolidated base net income for the nine-month period ended September 30, 2006.
For the year ending December 31, 2006, the Company expects to earn approximately $65 million (USD) of servicing revenue from EDULINX. Of this amount, approximately $51 million (USD) is expected to be earned under the CSLP contract. In addition, Nelnet expects that approximately $5 million (USD), or $0.09 per share, and approximately $6 million (USD), or $0.11 per share, of Nelnet's GAAP and base net income for 2006, respectively, will be contributed by EDULINX.
Item 2.06. Material Impairments.
As a result of the Government of Canada's decision to award the contract to provide financial and related administrative services for CSLP to another service provider as discussed in Item 8.01 above, Nelnet concluded that an impairment charge ...was required under GAAP. ....Accordingly, the Company currently estimates that it will record a non-cash pre-tax impairment charge of $9 million (USD) to $10 million (USD) during the fourth quarter of 2006. The actual amount of the impairment charge recorded will not be known until the Company has finalized its determination of certain servicing hardware and software assets to be sold and prepared or obtained updated estimates.
Under the current contract between EDULINX and the Government of Canada, EDULINX can earn performance incentive revenue if certain performance levels are achieved (as defined in the servicing contract). The current contract is for the period April 1, 2006 through July 31, 2007. Based on EDULINX achieving certain performance objectives through December 31, 2006, the Company may recognize up to $5.0 million (USD) during the fourth quarter of 2006 related to the incentives under this contract. (This incentive revenue is not included in the 2006 revenue, GAAP net income, and base net income estimated projections discussed under Item 8.01 above). Additional incentive revenue could be recognized by EDULINX over the remaining term of this contract.