So here are my questions and possibly erroneous statements/assumptions. Answer what you know; lets find out what you don't. If they reveal a lack of understanding about FMD's business, please fix it .. lot to learn in a short amount of time. 1) FMD is the loan servicer and (proxy?) originator of student loans. Schools set up with them; financial institutions provide cash warehouse facilities, auction rate brokering services, etc. 2) FMD loans out few billion per year to students. Default assumptions are at around 14%. 3) FMD uses warehouse facilities to loan out against temporarily until it 'securitizes' the debt, turning it into a bond or auction rate note on the open market. Is this recorded as "structural advisory fees" in receivables / revenue type? 4) Even after FMD securitizes the debt, they remain the debt servicer and make a profit margin of some sort on servicing the debt to the auction rate notes or bonds they facilitated in the creation of. Maybe some sort of the spread over libor goes to create this margin? Is this recorded as "residuals" in service receivables / revenue type? Besides lower residuals, are there any negative repercussions of defaults? I assume FMD is not exposed to principal losses on any of its past securitized products. 5) The near term woes of the auction rate note market is entirely responsible for FMD's lack of ability to sell new securitized debt. Since FMD's debt is floating to 1 month libor generally, they reprice yield to FMD debt buyers (bond buyers) on the Auction rate note market. But with TERI bankrupt, FMD can't get guarantees on short term cash flows to auction rate note buyers. This creates dilemma 6 and 7. 6) So new auction rate trades won't happen on FMD debt. Basically auction rate note holders on FMD are now incentivized to just hold the FMD debt, even if its cash flows are not insured anymore. This already existing FMD auction rate debt is probably trading at quite a substantial discount, probably at something like 500-700bp over libor ?? (junk) 7) Since the ARN market is trading at some large spread over libor for these notes, new securitizations that float would have to be trading at some comparable rate. That means student loans would only be available to end borrowers at rates of 700-900bp+ over libor using the current securitization method. But that means new student loan contracts. The past 350M of unsecuritized debt won't be able to conform to that deal. So that leaves FMD with the option of self financing their loans to students directly, tying up their warehouse or cash line. 8) But what is FMD doing with 2008 crop loans? Are they offering student loans as we speak? Whats to prevent them from offering fixed rate student loans instead of floating variable rate going forward? That way they can securitize the debt at market rates even without an insurer, albeit at higher rates. Please fix all of this which is incorrect. Maybe I'll post it to the yahoo boards. I post this with intent to understand their business model.
http://www.sec.gov/Archives/edgar/data/1262279/000104746908001106/a2182489z10-q.htm OK. There is $770M in receivables. I assume that is reflective of the life of the existing loan packages they service ??? Looking at second half 2007 service revenues = 418M if you don't include that write down. Cut that in half, assuming no 'structural advising fees' and that gives cash flow of around 200M. Correct? By the way, there was an 180M writedown. What were they actually writing down? Was it their future 'residuals' based on predictions of higher defaults? In conclusion, their first half 2008 cash flow should bump their cash position up by 200M, giving them substantial collateral to renew warehouse lines. Please again find flaws with this .... I want to learn here.
Okay. Give me time to try to go through the above more thoroughly, but you outlined the model as I understand it more fully and efficiently than I could at this moment. But how did you conclude what you did in 7), because I am under the impression that the 350 million is cash they received for processing/servicing activities they've rendered, for which they have no underlying exposure of default on the underlying debt, since those loan were already insured, bundled and sold off, and... ...in 8) I don't think FMD is securitizing loans absent an insurer (formerly TERI). Are they processing loans? I don't know. Who would pay them to process the loans, and what would they do with uninsured loans? It's my understanding they don't carry any such loans, nor do they even attempt to self-insure them. In fact, I was told by FMD directly that the last batch of loans they serviced were in September 07, which were accordingly insured and sold off in secondary markets to client banks. The latter point first...I recalled 177 million in writedowns because of loans that couldn't be sold as they were uninsured (due to TERI issues that had become known about 6 months back or so), so they didn't receive residuals they had previously accounted for. As to the first point, I saw 943,090,000 in receivables as of Sept 07, so I guess 770 million in receivables assuming that link is correct would mean they were paid approx 220 million between September 07 and the current time frame? I think, yes, the receivables provide them with cash flow from servicing past loans that were successfully insured and sold. I don't know if the 418 million dollar figure (and 50% of that) is correct or not, or includes or excludes such receivables??? If it excludes it, then FMD really is in an enviable position as far as being cash rich, debt free, and still receiving hefty cash flow going forward, even assuming no new loans are securitized??
p1. Loans held for sale 358,023 http://www.sec.gov/Archives/edgar/data/1262279/000104746908001106/a2182489z10-q.htm Look on the balance sheet. They are holding 358M of loans, unsecuritized, because i assume the auction rate or comparable market will not allow them to sell them for a favorable enough rate to make a profit margin on their loan terms to students. So this IS debt they are carrying on the book directly (self financing). ie. a.Students borrow 350M from FMD at 1 month LIBOR + 250bp. b. FMD goes to ARN market to refloat every month at LIBOR + 150bp ( i just picked this arbitrarily). TERI facilitated them being able to do that. Can't do that anymore. c. ideally, before TERI existed, FMD would make that 250-150bp spread -- that was the 'residual'. uninsured loans would be fine if they offered to students a fixed rate product with higher rates (because the market wants more returns for uninsured cash flows). additionally, these wouldn't be monthly adjusting. They'd have to be fixed products, since auction rate markets wouldn't be able to facilitate monthly resets of libor + riskspread without that TERI cashflow backing. I assume it wouldn't be competitive as student loans are, though ... so who knows. By the way, my understanding of auction rate securities is not personal. It is from reading this. http://accruedint.blogspot.com/2008/02/you-have-failed-me-for-last-time.html
Okay, I see that 358m in loans held for sale, but did they sell them, or void them because of TERI issues? I mean, they showed up as of December 31, 2007, but are they still on their books? I was told by FMD they hold no loans period. Maybe those were in queue, but couldn't be processed. This is an imperative question, but they were emphatic about this point, saying they do not carry the loans on their books, but only process and service them for buyers. I also see cash on hand of 243,170,000 plus 'investments' of 107,851,000 as of December 31 2007, so that's 350 million in cash they have now I assume. That amount will be lifted by Goldman's additional future injection.
Of the $358 million of loans held for sale at UFSB, $346 million are student loans. The remaining $12 million are mortgages. All of these assets are carried at the lower cost or markets." As per this balance sheet item, their exposure is limited. Even if its written down to 0, they are still ok. This is offset by the fact that they are borrowing from USBF Deposits $ 146,893 Education loan warehouse facility 245,400 Loan warehousing means they are borrowing money to temporarily store securities they have packaged before they sell. It is very possible they still have them on their balance sheet unable to liquidate/sell. I am ASSUMING even if it is still stuck on their sheet, they are ok otherwise they would've taken a loan from goldman. THis is assuming they didn't create even MORE securities, it has been a 4 month ago... it would be nice to get some insider info on the state of their balance sheet now!
I think they never sold those loans. yea. Its not exactly bear stearns. They look to be solvent, not overlevered. Wonder what their residuals look like since they are possibly hurt if LIBOR goes much lower. ie, they collect revenue at libor + 250 for example.. (remember, libor was around 5% just a few months back before the ECB 500B inject was absorbed into the system) more questions: 1) does FMD make the spread (like i suggested a few messages back)? or do the i-banks do all of this in house and merely pay FMD a servicing fee (which goes into residuals)? I didn't see anything in the 10Q about interest rate risk or liabilities of notes.
GS will be purchasing convertible, preferred notes. What is the price for them to convert to common shares? $15 or the current price? I am kinda confused on goldman's deal, they are only allow to inject no more than 25% of FMD's value including the initial 50 mill. Is this 25% of stockholder's equity as indicated on the balance sheet or 25% of the market cap? I understand that this restriction is in place to prevent GS from owning more than 25% stake in a savings and loan but does that mean when GS injects the money in the near future, it will be acquiring a ~25% stake of FMD?? That implies its basically purchasing shares at market price which is like $4. Any more details on this deal would be nice as I have difficulty finding much info on it. I think the terms of this deal is what will be what determines the value of FMD in the short term.
Thanks guys, you are clearly going over this with a fine comb. I admit I'm a little confused trying to grasp this whole situation. You can rack your brain with some of these companies and still be like WTF. All I know is their back is against the wall. I understand their cash position and what not. That will all change come their earnings report and it won't be as pretty. What matters for me between now and then on this ticker is Goldman's obligation and how gov't backs the student loan sector. I'm sure there are some out there who want to bury this company which they have and succeeded. It's still a coin flip at this point.