Sallie Mae Splits In Two, Will "Firewall" Student Loan Portfolio In Standalone Company

How do you "extract" shareholder value when everyone and their grandmother knows you are one of the sole public proxies of an epic student loan bubble? You firewall its nearly $160 billion student loan portfolio (including Federal and Private) portfolio and associated origination and servicing exposure in its own public company and spin off the remainder as a separate "consumer banking" company. That is what Sallie Mae has just done.

What are the "assets" being firewalled?

  • The education loan management business’ principal assets are likely to consist of approximately $118.1 billion in FFELP Loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets; and a leading education loan servicing platform that services loans for approximately 10 million federal education loan customers, including 4.8 million customer accounts serviced under the company’s contract with the U.S. Department of Education. In aggregate, this company will own approximately 95 percent of Sallie Mae’s existing assets and remain obligated for the company’s senior indebtedness.

The provided rationale for the split, from the press release:

The Board authorized management to pursue separation of the company’s existing businesses into two, separate, publicly traded entities -- an education loan management business and a consumer banking business -- to unlock value and enhance long-term growth potential.

 

The strategic plan will create two companies, each initially owned by Sallie Mae’s existing shareholders and the leader in its respective business lines. Sallie Mae would form an education loan management business comprised of the company’s portfolios of federally guaranteed (FFELP) and private education loans, as well as most related servicing and collection activities. This will be the leading education loan portfolio management, servicing and collection company, and Mr. Remondi will continue as its chief executive officer.

 

“This strategic separation represents a natural business evolution since FFELP originations ended in 2010. Sallie Mae has successfully adapted its businesses to remain at the forefront of education lending and servicing,” said Jack Remondi, chief executive officer. “Sallie Mae is the largest originator of private education loans, and we have diligently used credit standards that foster responsible borrowing. We’re also the largest servicer of private and FFELP loans with an important contract with the Department of Education. By separating our current operations into two businesses, we will facilitate focus on Sallie Mae’s growing consumer banking business and management of its education loan portfolios.”

What the last sentence should have said is the company will do its best to spin off whatever value it can from a ticking timebomb of what is becoming very clear to everyone is the next subprime crisis in terms of ultimate discharges, NPL and losses to originators. Luckily for SLM, the biggest originator in its case is the US government, which means the company's downside is limited.

That of the US taxpayer, however, especially if and when student loan discharge lawsuits swamp the US judicial system, isn't.