First Marblehead Tumbles, Guarantor Files Chapter 11
By Jody Shenn
First Marblehead Corp., the third- largest U.S. arranger of securities backed by student loans, tumbled as much as 39 percent after the guarantor of its loans sought bankruptcy protection.
First Marblehead dropped $3 to $4.70 at 10:41 a.m. in New York Stock Exchange composite trading after Education Resources Institute Inc., or TERI, filed for Chapter 11 in Boston yesterday. First Marblehead declined 82 percent in the past 12 months before today.
The bankruptcy filing means Boston-based First Marblehead may incur losses from any defaults, Friedman Billings Ramsey analyst Matt Snowling said. TERI, the largest nonprofit guarantor of private student loans with $16 billion insured, cited added cash demands from a credit-rating downgrade and tumbling demand for student loan securities for its failing finances.
The filing ``now shifts credit risk back'' to First Marblehead, Snowling, who is based in Arlington, Virginia, said today in a research note. ``The risk to the company's capital likely restricts the company's access to funding even further,'' he said.
The slump in credit markets sparked by the collapse of U.S. subprime mortgages cut into demand for private and government- guaranteed student loans, prompting lenders including CIT Group Inc. and NorthStar Education Finance Inc. to quit the business. No new private student-loan securities have been issued in the asset-backed market this year and government-backed offerings have tumbled 65 percent.
First Marblehead ``is working diligently on securing an alternative guarantor as well as structural solutions for loan default guarantees for future originations,'' according to a statement today.
The company is the third-largest arranger of securities backed by student loans, trailing Reston, Virginia-based SLM, or Sallie Mae, and New York-based Citigroup Inc.
Under the agreement with TERI, First Marblehead issues loans, usually on behalf of banks such as JPMorgan Chase & Co., and then has those loans guaranteed by TERI. The loans are then packaged into securities and sold to investors.
First Marblehead also holds onto the riskiest pieces of those securities, demonstrating why TERI's inability to make good on its guarantees may cause losses.
The private loan providers help students fill the funding gap between what's available with government-backed loans and the costs of college.
Private loans have been the fastest growing segment of the market, growing to $18.5 billion in the 2006-2007 academic year, or 19 percent, from $1.8 billion a decade earlier, according to First Marblehead.
Moody's Investors Service last month downgraded TERI to below investment grade, triggering a demand from a bank that the company set aside cash reserves to cover potential losses.
The ratings firms said defaults were particularly higher than it anticipated among First Marblehead loans to students who didn't work with financial-aid offices.
In response to growing financing costs and rising delinquencies, First Marblehead has raised rates, tightened guidelines and stiffened collection practices.
``We have adjusted our collection and underwriting strategies to adapt to the challenges presented by the turmoil in the capital markets and the current consumer credit cycle,'' First Marblehead said.
In December, Goldman Sachs Group Inc.'s private-equity arm agreed to inject $260.5 million of capital into the company, which reported a $117.7 million losses in a fiscal quarter ended Dec. 31.