BOSTON and NORTH PROVIDENCE – The First Marblehead Corp. (NYSE: FMD) cited the possible need for additional cash infusions into its Rhode Island subsidiary, Union Federal Savings Bank, as one of several factors that might accelerate the student lending giant’s decline.
“Student loan asset-backed securitizations have historically been the company’s sole source of permanent financing for its clients’ private student-loan programs,” First Marblehead wrote in its latest quarterly regulatory filing with the U.S. Securities and Exchange Commission. Recently, however, “the company’s business has been and continues to be materially adversely impacted by the current market dynamics, including an inability to access the securitization market and interim financing facilities. The company did not complete a securitization transaction during its second, third, or fourth quarters of fiscal 2008 or the first quarter of fiscal 2009. … and may not complete any securitizations during fiscal 2009. In addition, it expects pricing terms in future securitizations, if any, to be substantially less favorable than in the past.”
“Historically, the company has been entitled to receive structural advisory fees and residuals for its services in connection with securitizations of loans generated by the loan programs that it has facilitated,” as well as various marketing and administrative fees, First Marblehead noted in its SEC filing.
The company also has received reimbursements for services outsourced to First Marblehead by The Education Resources Institute Inc. (TERI), a nonprofit student loan guarantor. But on April 7, TERI filed a petition for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court for the District of Massachusetts. The nonprofit continues to operate its business as a “debtor in possession.”
In response, First Marblehead said it “has developed a private label loan program that would not require a guaranty from a third party, and … has begun to offer outsourced loan origination services and portfolio management services on a fee-for-service, stand-alone basis.”
Moreover, this May, Union Federal Savings Bank – a one-branch North Providence bank acquired by First Marblehead in November 2006 (READ MORE) – formed a new wholly-owned subsidiary, FM Loan Origination Services LLC (FMLOS), through which the company “plans to provide outsourced student-loan origination services on a fee-for-service basis,” First Marblehead wrote. “As a subsidiary of a federal financial institution, FMLOS provides the company with greater regulatory flexibility than it had previously,” the parent company added. But, it added, the bank “is not, as of the date of this report, able to fund loan originations in the private-label loan program due to its current lack of funding capacity.”
As a result of the TERI reorganization, however, “certain clients – including JPMorgan Chase Bank N.A, Bank of America N.A and RBS Citizens N.A. – have terminated some or all of their agreements with [First Marblehead], and the company has not received processing fees totaling $16,025 from TERI that were due,” First Marblehead told the SEC. The company also has suffered ratings downgrades as a result of the TERI failure that have raised its borrowing costs going forward.
First Marblehead’s “inability to access the securitization markets since September 2007” – together with the TERI bankruptcy reorganization – “has had, and will likely continue to have, a material negative effect on the company’s client relationships, facilitated loan volume, loans available for securitization and its ability to fully realize the cost reimbursement and guaranty obligations of TERI,” the company wrote.
“If our existing resources are insufficient to satisfy our liquidity requirements, or if we were to enter into a strategic arrangement with another company, we may need to sell additional equity or debt securities,” First Marblehead said, adding: “If we are unable to obtain this additional financing, we may be required to further delay, reduce the scope of, or eliminate one or more aspects of our operational activities, which could harm our business.”
Among other factors potentially affecting liquidity and capital requirements, the company listed the rapid rise in delinquencies on its portfolio of nearly $500 million in student loans; possible damage awards to former clients, “as a result of a failure to securitize their loans”; “the timing, size, structure and terms of any securitization or other funding transactions that we structure”; and “regulatory capital requirements of Union Federal and valuation adjustments relating to its portfolio of private student loans held for sale.”
As of Sept. 30, the saving bank posted equity capital of $108.1 million. But, First Marblehead noted, “Regulatory authorities have from time to time requested that we provide additional capital to Union Federal,” to ensure that the bank meets the capitalization requirements set by the Federal Deposit Insurance Corporation (FDIC) and federal Office of Thrift Supervision (OTS).
The First Marblehead Corp. (NYSE: FMD) is a provider of outsourcing services for private, non-governmental, education lending. Union Federal Savings Bank – a First Marblehead subsidiary – is a one-branch community bank in North Providence. For more information, visit www.FirstMarblehead.com or www.UnionFSB.com.
The U.S. Securities and Exchange Commission is the federal agency charged with protecting investors, enforcing federal securities laws and regulating the stock and bond markets. For more information, visit www.sec.gov. Information about the U.S. Treasury Department’s Office of Thrift Supervision, including the text of OTS enforcement actions, is available at www.ots.treas.gov.
