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Sallie Weighs Spinoff Against Asset Sales
Asset-Backed Alert (July 16, 2010)
Sallie Mae, which has been looking into a sale of the residual interests in its past securitizations of government-guaranteed student loans, could spin off its banking arm instead.

Apparently, there's a concern at the Reston, Va., company that the residual holdings won't sell for as much as it thinks they're worth, especially now that a wave of similar portfolios has begun making the rounds.

Residuals are the cashflows left over for asset-backed bond issuers after investors are paid. At issue in this case is an Obama Administration initiative that as of July 1 cut off subsidies offered to lenders under the Federal Family Education Loan Program. While existing loans are still covered, a growing number of shops are now unwinding their FFELP operations - a process that makes it more appealing to sell their residuals rather than waiting for the payments to arrive.

However, Sallie is telling equity analysts that it could spin off its Sallie Mae Bank division instead. Officially, the lender isn't favoring one option over the other at the moment. But outsiders say a spinoff is more likely. A decision is likely by the end of September.

The process would see Sallie Mae Bank assigned with the task of originating and servicing private loans without government guarantees. Sallie's residuals and yet-to-be-securitized FFELP loans, meanwhile, would be cordoned off as part of the parent company's SLM Holding unit. The apparent thought is that by separating Sallie Mae Bank from SLM Holding, the core company could no longer be viewed as a bank - and therefore wouldn't be subject to potential increases in capital-holding requirements for FFELP assets.

Sallie Mae Bank is currently categorized as an industrial bank. The fear is that commercial-banking regulations could expand to encompass such institutions, thus making SLM Holding a bank holding company. Sallie currently owns about $155 billion of FFELP loans, and can't fathom the idea of pulling together enough capital reserves to cover that portfolio.

It's also possible that Sallie Mae Bank would be viewed as the more viable entity and that SLM Holding would essentially be in runoff mode. Now that FFELP has expired, private loans account for all of Sallie's new education-finance activities. Sallie Mae Bank also serves as home to the company's servicing arm, which is viewed as one of its most valuable assets.

Equity analysts theorize that current Sallie shareholders might be given a choice of stock in either the parent company or Sallie Mae Bank. While details are still being worked out, it's possible Sallie will shed some light on the issue when it announces its second-quarter earnings on July 20.

It's also unclear how much residual income Sallie is due to collect overall, although the amount stands to be impressive. According to Asset-Backed Alert's ABS Database, Sallie has sold more than $200 billion of bonds backed by FFELP credits since entering the market 15 years ago. About half of those securities are estimated to be outstanding. Company insiders say the residuals currently generate some $1.5 billion each year for the company.




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