Magazine article American Banker

Distinguishing between Student Loan Specialists

Magazine article American Banker

Distinguishing between Student Loan Specialists

Article excerpt

A UBS Securities LLC analyst is giving lukewarm reviews to student loan specialists.

Eric Wasserstrom recently initiated coverage of First Marblehead Corp., a Boston company that provides outsourced back-office services to private student lenders, with a "reduce 2" rating -- the equivalent of "sell."

At the same time he gave Nelnet Inc. a "neutral 2" rating and a backhanded compliment -- that he prefers the Lincoln, Neb., lender to the leader in the field, SLM Corp., better known as Sallie Mae.

First Marblehead's "client concentration will, at a minimum, pressure margins for the next several quarters" and in the longer term can lead to the "loss of significant loan volume," Mr. Wasserstrom wrote in a report published last month.

The company's model is better suited to serving smaller banks, he said, because the bigger companies have the scale and underwriting capability to securitize on their own. But two big banking companies, JPMorgan Chase & Co. and Bank of America Corp., provide 80% of First Marblehead's loan volume.

"Despite the recent contract renewals, should either or both of the banks take their business in-house at some point, the loan volume would be difficult to replace from other clients," Mr. Wasserstrom wrote.

Indeed, shares of First Marblehead sank almost 16% Thursday after another analyst revealed that it recently lost some business from B of A. (On Friday they recovered a bit and were up about 3% in early afternoon trading.)

Mr. Wasserstrom warned that First Marblehead's margins could also be hurt by a shift in the mix toward lower-yielding school channel loans and pricing pressure from alternative products and new competitors. …

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