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Goldman's Sallie Mae Deal Offers Long-Term Liquidity
Asset Securitization Report--SourceMedia (January 19, 2009)
The Jan. 6 filing by SLM Corp., known by the Sallie Mae moniker, to pursue a $1.5 billion financing through Goldman Sachs, represents an innovative deal structure that Goldman pioneered with CIT Financial last year.
The transaction provides a secure source of long-term liquidity in what have been highly insecure funding markets.
Consumer and commercial lenders have become increasingly reliant in recent years on short-term sources of funding to finance their loans, such that maturities on funding for larger public lenders have rarely exceeded one year. That has become a potentially risky funding strategy, given the credit freezes striking over the last year in the wake of unexpected events, most recently Lehman Brother's September bankruptcy filing.
"Broadly speaking, one of the key issues for commercial and consumer finance companies is the reevaluation of their funding mix," said a source close to the transaction. "The funding mix has become very skewed to a variety of short-term markets, so [longer] term funding has become much more compelling."
Banks' lending and the capital markets, including securitizations, have all but halted as those lenders work out their out their own capital travails, especially for non-stellar credits.
Standard & Poor's rates the senior unsecured debt of SLM Corp. at 'BBB' with a stable outlook, while Moody's Investors Service rates the firm's senior unsecured debt at 'Baa2' and changed its outlook to negative from under review Nov. 4.
The facility for Sallie Mae, the leading provider of non-government-backed student loans, referred to as private student loans, was structured as a 12.5-year total return swap that will finance 'AAA'-rated asset-based securities backed by student loans - mostly private student loans with other assets permitted that meet specific criteria. With a 10.5-year weighted average life, the deal cannot exceed $1.5 billion until July 25, 2017, after which it will amortize quarterly until its maturity, according to the firm's 8K filed with the Securities and Exchange Commission.
"[The facility] gives a boost to the private student lending arm of the company not only because of the size of the deal but also because it provides a source of capital for an extended period of time," said David Hartung, a senior vice president and ABS analyst at DBRS.
The ABS will be marked to market and should their fair value differ from the current funded amount, either Goldman or Sallie Mae will be required to post additional collateral. For providing the facility, Goldman will receive three-month Libor and a 5.75% annual facility fee.
The source close the unrated transaction noted that the total return swap is the "document that creates the strategic liquidity commitment," and the liquidity is to be provided under the terms of that document. Over time, Sallie Mae will present the individual 'AAA'-rated securities - collateralized by the student loans - to be financed by the facility.
That approach is fairly common today, although typically with short-term facilities, which currently present potential credit risk for large commercial and consumer lenders when they must be refinanced in today's volatile markets. The 12.5-year structure mitigates that risk. Sallie Mae declined to comment on the deal until the first securities are financed by the facility.
A major difference from traditional ABS deals, in which lenders typically have recourse to assets parked in a special purpose vehicle, is that Sallie Mae's deal gives Goldman recourse to SLM Corp., the student lender's corporate entity. So in addition to the quality of the student loans backing the ABS, Goldman is considering the financial health of Sallie Mae, its counterparty.
"Goldman is considering Sallie Mae's credit risk," Hartung said, adding that Goldman's providing the facility reflects the strength it sees in Sallie Mae's business.
Sallie Mae's deal closely replicates a $3 billion, 20-year financing arrangement Goldman structured for CIT Financial, a subsidiary of CIT Group, a major provider of consumer and especially commercial loans. CIT announced it was entering that deal June 9, when the credit crisis was unfolding but had yet to reach the proportions it did following the collapse of Lehman, when most commercial credit markets all but froze.
CIT's transaction was also structured as a total return swap with respect to ABS, although those securities represented a much broader variety of assets, including commercial loans, equipment contracts, government-guaranteed and private student loans, aircraft or rail leases, and other assets besides home mortgage loans. CIT's 8K noted that the portfolio would be marked to market on a daily basis by Goldman and to the extent the market value, less any relevant discount percentages, differed from the amount then financed under the facility, either CIT or Goldman would be required to post additional collateral.
That deal cost CIT an annual facility fee of 2.85% on the full amount of the facility and three-month Libor for any funded portions.
Hartung said Sallie Mae's deal was favorable for the company, in part because the lender services its own loans and operates its own collection operations, so the increased lending volume afforded by the new financing "translates into increased servicing volume and revenue."
He added that the deal may have positive ramifications for other student-loan lenders and the overall non-government-guaranteed student loan market, which has been challenged by the current credit environment. "The deal also sends a very positive message to the broader student-loan ABS market because it demonstrates support from Wall Street for the private student loan business," Hartung said. "It provides the prospect for future issuance of more private student loan ABS, which historically has been an attractive product," he added.
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