Will Sallie-Mae's Break-Up End The Cov-Lite Cravings?

Tyler Durden's picture

Over the past few months we have explained in detail just how 'frothy' the credit market has become. Probably the most egregious example of this exuberance is the resurgence in covenant-lite loans to record levels. It seems lenders are so desperate to get some yield that they are willing to give up any and all protections just to be 'allowed' to invest in the riskiest of risky credits. With credit having enjoyed an almost uninterrupted one-way compression since the crisis, momentum and flow has taken over any sense of risk management - but perhaps, just perhaps, Sallie-Mae's corporate restructuring this week will remind investors that high-yield credit has a high-yield for a reason. The lender's decision to create a 'good-student-lender / bad-student-lender' and saddle the $17.9bn bondholders with the unit to be wound-down, while as Bloomberg notes, the earnings, cash flow, and equity of the newly formed SLM Bank will be moved out of bondholders’ reach. Bonds have dropped 10-15% on this news - considerably more than any reach-for-yield advantage would benefit and we wonder if these kind of restructurings will slow the inexorable rise in protection-free credit.



Via Bloomberg,

SLM Corp. (SLM) dealt bondholders a blow as the student loan company prepares to move cash-generating assets out of their reach and rely more heavily on secured funding as it seeks to split into two separate entities.




Sallie Mae is separating its education loan business from its consumer lending operation, following legislation in 2010 that cut companies out of the government-guaranteed student loan market. The lender’s $17.9 billion of unsecured bonds will be serviced by the company housing Sallie Mae’s $118 billion portfolio of U.S.-backed loans that it’s winding down, while the earnings, cash flow and equity of the newly formed SLM Bank will be moved out of bondholders’ reach, according to Moody’s.


Anytime you split a company up like this and some portion of the cashflows that could have been available to support debt payments is no longer available, it is incrementally negative for bondholders,”




“The company is going in the wrong direction in terms of building balance sheet strength with what we consider an over-emphasis on returning capital to shareholders,” Peter Thornton, a credit analyst at KDP Investment Advisors Inc., wrote in a research note yesterday. “Unfortunately for Sallie Mae creditors, all of the current unsecured debt will stay at” a newly formed entity that contains the government-guaranteed debt while the “more promising future businesses” are stripped.




“What they are spinning off is the higher-risk profile business; what is staying behind is the steady cashflow business,” he said.

And so - by slaying bond holders, the firm manages to benefit shareholders. All sounds great for the equity bulls until one realizes that there is a limit to this kind of action - once credit starts to reprice to this more activist perspective, then the capital structure will necessarily reduce the value of future 'equity' cashflows and weigh on earnings (interest expense). Simply put there is no free lunch for stocks at the expense of credit - it is a lead-lag relationship - not a win-lose...

and credit has been leading the turn...

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Edward Fiatski's picture

I've some high yield bonds I'd like to sell you... originating from the Aegean sea. :)

YC2's picture

How do I buy my student loans back at their market rate they are trading for? I've talked to a friend in the MBS business and the analogy he saw was calling the lender and making an offer for a discounted payoff. However, that seems like a negative credit event.

Maybe we can get everyone bundles in an issue and buy it back, depending on where its trading vs free riders issues. Then just forgive ourselves. Just spitballing here...

cnmcdee's picture

They'll never lower your balance owing - why owuld they? How can you negotiate a default?  However every American in the country should bust their asses till they can get a line of credit equal to their student loans - use one to pay the other, then default the next day.. Make sure you don't own fuck all either so they have nothing to seize.. then go merrily on your way debt free forever more

YC2's picture

If the owner paid 60 cents on the dollar and you make them am offer that nets them whatever IRR they are trying to get, in some circumstances you can negotiate a discounted payoff. I've heard f this with commercial real estate but I'm not too knowledgeable on the specifics on the debt side

So, not really lowering the balance but buying the asset at market and forgiving the balance. This might be considered income, too....

Rob Jones's picture

I wonder if I could split myself into a 'good Rob Jones' and a 'bad Rob Jones' where the good RJ keeps the job, the car, and the PMs while the bad RJ gets stuck with the debts. Not sure which one would get the wife.

ACjourneyman's picture

I will go one better and split myslef into 2 entities, one that works hard and keeps 50% of his money and the other a welfare mother of 10 kids getting benefits. Boy would I be living large.

Dewey Cheatum Howe's picture

Speaking of mortgages and foreclosures file this one under the beatings will continue until moral improves.


Wells Fargo forecloses on Florida man for paying his mortgage early


Etienne Syldor of Orlando, Florida was never late with paying his mortgage and even sent his bank more money than he owed every month. That’s why he’s outraged that Wells Fargo has informed him that they’re foreclosing on his home.

Syldor, a Haitian immigrant who works as a bus driver at Disney World to make pay his mortgage every month, has hired a real estate attorney to fight the foreclosure. 

Speaking to WFTV News, Syldor explained that he could lose his house for being too punctual with his payments.

"And you didn't miss any payments?" reporter Kenneth Craig asked Syldor.

"I didn't miss any," Syldor responded.

"And you overpaid?" Craig asked.

"I overpaid," Syldor said.

The root of the problem appears to be exactly the opposite of what Syldor — or any other homeowner — would expect: the foreclosure proceedings actually got off the ground because Wells Fargo was receiving the payments before they were expecting them.

Syldor said to WFTV that he was offered a temporary mortgage modification by Wells Fargo last year and was told that it would become permanent if he made four monthly payments during that time. According to the bank, though, being overly eager to pay up could have caused the problems. 

Even though Syldor wrote his checks in time, in doing so he acted outside of the payment guidelines, essentially risking his house because he failed to abide by the fine print.

"For some loans, completing trial payments is a significant step toward a permanent modification; however, in this instance, the loan was part of a mortgage-backed security and in a protected pool, with specific payment guidelines,” Wells Fargo said in a statement to WFTV. - So if you try to pay more than you owe or early they fuck you when it is a MBS. Talk about perptual debt slavery I wonder if they foreclose on you if you try to pay off the mortgage in full when not following them specific payment guidelines. Not noyl that they at least on surface they bait and switched him on a way to get extra payments that purposely violated the MBS guidelines so they didn't have to lock in that temporary rate long term. Malice or stupidity on the Wells Fargo's part you decide.

LaMya Henry, an attorney retained by Syldor, told the network that "When he came in and showed me all of the documents, it was just unbelievable."

"Who gets foreclosed on when they've made all payments on time?" she asked

In a statement sent to WFTV, the banks wrote, “We are working with Mr. Syldor to explain the guidelines and explore options that may help."

This isn’t the only time as of late that Wells Fargo found itself in trouble for foreclosing on a home. The bank recently became targeted with a lawsuit filed after a 62-year-old Navy veteran died during a hearing over his home’s foreclosure. Wells Fargo foreclosed on Delassus’ California home after a typo had the bank thinking he owed tens of thousands of dollars more than he did. He was suing the bank for negligence and discrimination against a disabled person when he died in court last year. His friends have since filed a wrongful death suit.

Never One Roach's picture

But my Broker told me, "Bond prices never go down."

Yes_Questions's picture



Do the bankruptcy laws sunset?

B2u's picture

When are they going to sell bonds yielding 20% with no risk to principle.  I received a call from the bank, Irene Mary Ponzi seemed very nice and honest.  She said the earlier I invested, the better my return.

Son of Loki's picture
Cities where suburban poverty is skyrocketing


For the first time, there are now more people living in poverty in the suburbs than in cities. In some metro areas, the number of poor people living outside the city proper has jumped even more rapidly. In the Atlanta, Ga., suburbs there are roughly 480,000 more people living below the poverty line than there were in 2000, an extraordinary 158% increase in the number of the suburban poor.

1. Atlanta;

2. Austin;

3. Salt Lake;

4. Las vegas;

5. Denver.


Read the ful story here:




Not much has hcanged. I still see builders handing out 'no-money-down' houses and hear ads on the radio for 'zero-down mortgages.'  Handing out houses to people who cannot afford them...what do you expect?  These problems will only get worse with more neighborhoods turning into essentially public housing slums.


"Weed shoots."

Downtoolong's picture

“Anytime you split a company up like this and some portion of the cashflows that could have been available to support debt payments is no longer available, it is incrementally negative for bondholders,”


I see it as fraud when a corporation borrows money from lenders under the pretense of having one structure, then later restructures to the detriment of those same lenders. Why wouldn’t every company be encouraged to do this now, i.e., unilaterally spin off weak assets and hard liabilities into a second bad company on the verge of bankruptcy so that the remaining good company can shine?  

This kind of thing on demonstrates once again how the entire market is a joke, ultimately leaving all investors at the mercy of financiers and lawyers.  

"Bonds have dropped 10-15% on this news"

And one can only speculate how many Wall Street insiders and Congressional staffers got the news before the rest and traded on it for a profit, unless of course one happens to be one of them.   


sadmamapatriot's picture

I have been paying that bitch Sallie for almost 20 years! I am almost paid off. Bitch locked me in at 8.25% and no refinancing for me when interest dropped, thank you very much. The whole school loan program is why college/grad school is so expensive now AND why people borrow money and study bullshit degrees. Abolish the entire goddam thing!!!