Leading U.S. student lender SLM Corporation (SLM), also known as Sallie Mae, recently declared the formation of a new loan trust named SLM Student Loan EDC Repackaging Trust 2013-M1. Sallie Mae sold BBB-rated bonds at face value of $225 million with a weighted average life of 3.05-year and a 3.5% interest rate, through this trust. The student lender also did away with its entire residual interest of the trust.
The SLM Student Loan EDC Repackaging Trust 2013-M1 is collateralized by the remaining interests from SLM Student Loan Trusts 2006-8, 2006-9 and 2007-1. However, the company declared that it will continue servicing the loans in these trusts as per existing agreements.
The sale will result in the elimination of student loans worth $6.6 billion and associated liabilities worth $6.4 billion from Sallie Mae’s balance sheet. Further, the gains from the deal will result in approximately 23 cents per share added to Sallie Mae’s second-quarter 2013 GAAP as well as core earnings.
In Mar 2012, both the U.S. House and the Senate passed a bill to overhaul the student loan program, ending the Federal Family Education Loan Program (:FFELP) that provided federal subsidies to private lenders.
The bill required the origination of federally guaranteed student loans under the Direct Loan Program run by the U.S. Department of Education while eliminating the role of private lenders altogether. Hence, in compliance with the above legislation, Sallie Mae stopped originating new federally guaranteed student loans after Jun 30, 2012.
In an attempt to align its business model in conformity with the regulatory changes, Sallie Mae has been actively selling its residual stake in Student Loan Trusts.
In April, the company declared the completion of the sale of its remaining interest in its SLM Student Loan Trust 2006-2 securitization to a third party. The sale will result in the elimination of student loans worth $2.03 billion and associated liabilities worth $1.99 billion from Sallie Mae’s balance sheet. Further, the gain from the deal will result in an additional 13 cents per share to Sallie Mae’s second-quarter 2013 GAAP as well as core earnings.
Earlier in February, Sallie Mae sold its remaining interest in its SLM Student Loan Trust 2007-4 securitization to a third party. However, under the existing contract, Sallie Mae will continue servicing the student loans in the trust.
The sale will result in the removal of student loans of $3.8 billion and associated liabilities worth $3.7 billion from Sallie Mae’s balance sheet. Further, the gain from the deal will result in an addition of 8 cents per share to Sallie Mae’s full-year 2013 GAAP as well as core earnings.
Suspension of the new federal student loan origination – in conformity to the legislation – will continue to hamper the revenue generation capabilities of Sallie Mae. Notably, in May, the company announced a plan to split its present business into 2 parts – an education loan management business and a consumer banking business.
We believe that Sallie Mae’s strategic decision to focus on its flourishing private student loan business will help it navigate the challenging operating environment. Further, its leading market position and diversifying efforts will drive earnings in the near term.
Sallie Mae currently carries a Zacks Rank #3 (Hold). Better performing stocks in the same sector include Provident Financial Holdings, Inc. (PROV), TriCo Bancshares (TCBK) and American National Bankshares Inc. (AMNB), all of which have a Zacks Rank #1 (Strong Buy).
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