from
(snip)"An Unusual Story in Bloomberg About Sallie Mae, with the Usual Dose of Non-Sensical Optimism
by Reggie Middleton
Sometimes I have to actually read articles twice, because it really seems that I have somehow missed the point the first time around. Well, on my third glance at this Bloomberg article, I still don't get it SLM Sells Debt at Higher Interest Rate Than Students Pay: Credit Markets
March 17 (Bloomberg) -- SLM Corp., the largest U.S. student-loan company, raised $1.5 billion in the bond market, paying more than it charges some borrowers to begin addressing $11 billion of bonds maturing through next year.
Sallie Mae, as the company is known, sold $1.5 billion of 8 percent notes due in 2020 at a yield of 8.25 percent, according to data compiled by Bloomberg. Stafford federal loans disbursed between July 1, 2009, and June 30, 2010, have a fixed interest rate of 5.6 percent, according to the company's Web site.
I know I'm not as good at math and finance as those fancy Wall Street banker guys, but isn't this a BAD thing? They are essentially borrowing themselves into a hole. I also don't see any indication in the article of the potential for a reversal in this trend, either.
With $4.51 billion of bonds maturing this year and $6.44 billion in 2011, Sallie Mae is reestablishing access to unsecured debt markets. The offering may bolster investor confidence, lowering borrowing costs as the company will likely need to tap debt markets again, said Matthew Eagan, a money manager at the Loomis Sayles Bond Fund in Boston.
I'm not a shareholder, but this would drain my confidence, not bolster it. they have a lot of debt to rollover, and thus far they are rolling it over at a significantly negative spread to their main product! Even if they were to be able to lower their borrowing costs, it looks as if they may have to nearly halve it in order to be cashflow positive, unless servicing is really that profitable or they will be able to raise the rate they charge their customers. Again, I don't follow the company so there may be extenuating circumstances of which I am not aware, but this blurb did seem rather odd to the casual observer.
"They're in a virtuous cycle now," said Eagan, who helps oversee $18.9 billion, including Sallie Mae debt. "People will see they can raise money in the market and they're going to have no problem refinancing all these near-term maturities, pushing their cost of borrowing down."
Oh, I see. It really is that easy??!!
Sallie Mae hadn't sold unsecured debt since a $2.5 billion offering of 10-year notes in June 2008. Its sale came after average yields fell to 3.978 percent yesterday, the lowest since Dec. 6, 2004, according to the Bank of America Merrill Lynch Global Broad Market Corporate index.
When the company issued asset-backed bonds linked to student loans on March 3, the debt priced to yield 325 basis points, or 3.25 percentage points, more than the London interbank offered rate, Bloomberg data show. Three-month Libor, a borrowing benchmark, was set at to 0.266 percent today.
'Expensive for Them'
"This will be expensive for them," said Peter Thornton, an analyst at KDP Investment Advisors in Montpelier, Vermont. "When you're a lender you need to borrow money as cheaply as possible if you're going to turn around and lend it."
"as cheaply as possible"!!! Let's try borrowing it a little cheaper than you lend it out for starters!"(snip)
That's one hell of a business model ... borrowing additional money at an 8% interest rate, then turning around and lending it out at a 5% interest rate ... with nearly a 10% default being likely on (non)repayment of those 5% student loans !!! By my calculator this translates into a 13% net loss rate for Sallie Mae on Stafford Loan money.
In a larger sense, this is 'fallout' from the unprecedented level of new borrowing ( = new treasury bond issuance ) by the US federal gov't. As pointed out elsewhere in this link, gov't agencies like Sallie Mae / Fannie Mae / FHLB are now in direct competition with the US Treasury in their attempts to borrow yet more money from a limited number of (foreign) investors. This MUST result in higher interest rates being paid by these gov't agencies, which in turn must eventually come home to roost at the 'retail' level i.e. new student loans / new mortgage loans etc.
If there's any upside whatsoever for Sallie Mae and future seekers of low interest student loans, it's the fact that gov't subsidized student loans cannot be discharged as a result of a bankruptcy filing. Thus Sallie Mae will find itself with an ongoing income stream as yesterday's student loan borrowers will wind up making small payments on those student loans for the rest of their lives ( with the IRS acting as collection agent !)
As to short term downside, it's inevitable that Sallie Mae must now go to the 'well' i.e. the US taxpayer for billions of dollars worth of additional 'bailout' funds since they are losing money hand over fist with every 'rollover'.
Of course, there is another dirty little secret buried in the Sallie Mae situation. If you are 'rich' enough to be able to afford the $50,000 price tag of these most recently issued Sallie Mae bonds, you can earn yourself an 8 1/4% income on that investment that is exempt from federal income tax ... with the implied guarantee of the US Treasury / taxpayer thrown in free of charge !!! 'The rich get richer' despite lip service to rising income tax rates ( from which these Sallie Mae bonds are 'immune') !
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