First Marblehead shares plunge
After a nonprofit firm that guarantees student-loan services filed for bankruptcy, credit risks were seen to shift, sending First Marblehead shares lower.
April 8, 2008: 1:07 PM EDT
BOSTON (AP) -- A nonprofit firm that provides financial guarantees for student-loan services provider First Marblehead Corp. filed for bankruptcy protection, sending First Marblehead's already-battered shares down sharply Tuesday.
The filing after business hours Monday by The Education Resources Institute Inc. sent shares of First Marblehead (FMD) down $2.75, or 36%, to $4.95 in midday trading, below the previous 52-week low of $7.36 that the stock hit March 17.
Shares of Boston-based First Marblehead traded around $40 last fall. But the stock has since been hit by turmoil in credit markets that has spread from housing to other areas such as the $85 billion student loan market, which has seen rising defaults among student borrowers.
The Chapter 11 filing by The Education Resources Institute, best known by its acronym TERI, "now shifts credit risk back to (First Marblehead)," Matt Snowling, a Friedman Billings Ramsey analyst, said in a research note.
The value of some of First Marblehead's investments "is questionable as losses once thought to be covered by TERI shift back to (First Marblehead)," Snowling said.
Boston-based TERI provides guarantees for more than $16 billion in nongovernment student loans, pledging to cover unpaid loans and offer security to bond investors who purchase student loans bundled into securities. First Marblehead receives fees for initiating and processing private student loans for banks and other lenders, and sells bundled loans.
First Marblehead said in a news release Tuesday that since 2001, TERI "has been the exclusive third-party provider of borrower default guarantees for our clients' private student loans."
The company also said it "is working diligently on securing an alternative guarantor, as well as structural solutions for loan default guarantees for future originations."
TERI's bankruptcy filing lists between 200 and 999 creditors, with First Marblehead by far the largest with a potential $11 million in claims. The second-largest is the National Collegiate Student Loan Trust, with $2.7 million.
TERI estimated assets of more than $1 billion, without specifying an amount, and liabilities of $500 million to $1 billion.
The company's president and chief executive, Willis Hulings, said in court papers that TERI has guaranteed more than 2 million loans totaling more than $20 billion since 1985, and "has never defaulted on any student loan obligations."
Recent credit turmoil has "evaporated" investor demand for bonds backed by student loans, and First Marblehead "has not been able to arrange securitizations," Hulings wrote. "As a result, TERI has experienced a significant decline in revenues just as the slowing economy led to an increase in the default rate of student loans."
TERI cut its 2008 operating budget by 20% and terminated 25 employees, or about one-fifth of its staff, Hulings said.
A March 26 downgrade by Moody's Investors Service sent TERI's credit rating to "junk" status, leading the company to set up a reserve to support its loan guarantees. But the creation of that reserve hurt the company's available cash.
"TERI believes that the filing of the Chapter 11 case will enable it to avoid a near-term liquidity crunch that, without the protections afford by Chapter 11, would threaten its viability," Hulings said, adding that the company hopes to develop a long-term business plan to continue its loan guarantee programs.
First Marblehead's loan-servicing in fiscal 2007 totaled about $4.3 billion, covering students at more than 5,800 schools.http://money.cnn.com/2008/04/08/news/co ... ahoo_quote