FFELP Capital Markets Update

NCHELP Spring MeetingMay 15, 2012

Mark WeadickStudent Loan Capital Strategies LLC

Discussion Topics

• Topics to discuss today include:

– Student Loan Collateral Performance

– FFELP Capital Markets Conditions

– Changing Business Models/Consolidation

– Predictions for 2012 and 2013

– and…….Industry Gossip

• I’m looking forward to an open discussion, so please ask Qs as we go.

• Thank you for having me at your meeting.

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Who holds Student Loan Collateral?

Loan Programs: $870 B Funding Source: $870 B

Dollars in Billions, Public sources and SLCS guesstimates as of September 30, 2011

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Private, $110 B

Direct, $300 BFFELP, $350 B

FFELP - DOE Owned, $110 B

Balance Sheet, $70 B

FRN, $265 B

Govt., $410 B

Warehouse Borrowing, $30 B

Munis, $25 B

Straight-A Funding CP, $35 B ARS, $35 B

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FFELP Performance Stabilizing?

• Forbearance and delinquency have increased

• Cohort gross defaults have increased; likely will reach low to mid 20% levels

Source: SLM public reports; SLCS estimates

3/31/2012 12/31/2010 12/31/2009 12/31/2008 12/31/2007 12/31/2006

In Forbearance 17.2% 18.6% 16.8% 15.2% 14.2% 14.0%As % of Forbear. and Repayment

31+ Delinquent 18.1% 17.2% 17.6% 16.5% 16.7% 16.4%As % of Repayment

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FFELP CPRs are Slower

• Since issued Trust CPRs as of 12/31/11:

Source: SLM securitization reports

Stafford/PLUS Consolidation

2004-4 13.5% 2005-3 1.6%

2005-1 15.0% 2006-2 2.4%

2006-1 11.8% 2007-1 1.9%

2007-2 6.9% 2007-8 1.0%

2008-1 1.4% 2009-1 2.2%

FFELP Financing Spreads•The table below shows FFELP FRN financing spreads over time.

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Bond Average Life 3 Years 5 Years 7 Years 10 Years

Pre Credit Crunch -1 3 8 15

November 2009 75 90 105 NAMay 2010 65 80 95 NAMay 2011 65 85 120 140March 2012 80 110 135 175May 2012 60 85 120 165

Student Loan ABS SpreadsInterest Cost of Bonds Backed by Student Loans

Interest Cost Expressed as a Spread (bps) to LIBOR

Forward Interest Rates

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•Existing ARS financing trusts benefit from low interest rates.

•The graph below illustrates forward interest rate projections based on LIBOR. The current projection continues to call for low rates for some time.

Securitization Then & NowPre Credit Crisis

• Investment Grade market – “AAA” down to “A”

• Advance rates up to 104% of FFELP Portfolio

• “Ready, shoot, aim” investor marketing

• “All-in” debt cost of LIBOR + 25

• ARS and FRN markets are workhorses• Trust structures contain myriad of debt

types – ARS, FRN, Muni, Fixed Rate, RRN

• Excess Spread released at 103 parity• Rating Agencies “fair and flexible”

Current

• “AAA” taxable market only; though munis down to “A” marketable

• Advance rates around 95% of FFELP Portfolio

• “By appointment only” investor marketing

• “All-in” debt cost of LIBOR + 100A in ARS “fail” mode; and +110A for new issue

• FRN market selectively open• Discreet Trust Structures only• Excess Spread retained until Investors

paid• Rating Agencies “very tough”

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NFP/Agency FRN Transactions

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Date Issuer Par Classes WALs Discount Margins2/17/2011 North Texas HEA 210,200,000 1 6.7 110

3/2/2011 North Carolina SEAA 445,000,000 3 2.0 / 6.0 / 12.8 52 / 105 / 143

3/18/2011 Brazos HEA 1,519,000,000 3 1.8 / 6.2 / 11.2 45 / 80 / 105

4/14/2011 LPFA 2011-A 509,000,000 3 2.2 / 6.3 / 11.2 60 / 115 / 140

5/3/2011 Edsouth 2011-1 859,200,000 3 2.8 / 9.6 / 15.6 60 / 65 / 370

5/24/2011 Panhandle Plains HEA 2011-1 483,200,000 3 2.0 / 6.0 / 11.5 55 / 115 / 145

5/25/2011 North Carolina SEAA 516,000,000 3 3.0 / 7.0 / 11.0 53 / 120 / 140

6/21/2011 Pennsylvania HEAA 1,676,000,000 1 8.0 110

6/29/2011 Oklahoma Student Loan Authority 2011-1 205,200,000 1 6.4 115

7/19/2011 Missouri Higher Education Loan Authority 576,800,000 1 5.7 100

8/24/2011 New Hampshire Higher Education Loan Corp. 2011-1 522,635,000 3 2.5 / 6.5 / 11.7 65 / 125 / 158

9/28/2011 Utah State Board of Regents 2011-1 397,000,000 3 2.0 / 6.0 / 9.1 75 / 130 / 165

10/5/2011 Panhandle Plains HEA 2011-2 603,130,000 3 3.0 / 7.0 / 10.8 90 / 130 / 165

11/22/2011 Iowa SLCC 2011-1 249,000,000 1 8.4 200

1/26/2012 South Texas HEA 2012-1 276,000,000 3 3.0 / 7.0 / 11.5 80 / 135 / 185

3/8/2012 Educational Services of America 2012-1 391,530,000 1 5.5 115

4/27/2012 Montana HESAC 2012-1 1,145,300,000 3 2.0 / 7.0 / 14.2 60 / 120 / 165

5/3/2012 MOHELA 2012-1 256,100,000 1 4.7 83

Total 2011 to 2012 to Date 10,840,295,000

Rating Agency Update•The rating process is substantially more complicated:

•Chinese wall between rating engagement and rating process

•Rating analysts cannot discuss transaction structure

•Servicing and trust administration a key area of focus - Backup Servicing and Administration often required

•Increased surveillance post closing

•Stepped up site visits and heightened scrutiny broadly

•Moody’s requires tapes direct from the servicer to verify collateral work

•SEC rule 17g-5 may come into play – requires all deal documents to be posted to a website where any rating agency can choose to rate a transaction 10

FFELP “Fair Market Value”

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Par

• The chart below shows Sallie Mae’s fair market value disclosures for their FFELP Portfolio from Dec. 31, 2006 to the present.

Source: SLM SEC filings

Market (R)Evolution

•Private Sector FFELP Portfolio is $350 Billion and amortizing

–Non-scale programs: “Restructure”, “right size” or “sell”?–Scale programs: add Portfolio and servicing volumes to defray investment– An estimated $50B is not term financed

•Capital Markets recovery: more “half full than half empty”

–Financing costs have tightened dramatically though remain elevated–Financings are difficult to execute – a “by appointment only” market– Approximately $28B of Loans are financed in ECASLA’s Straight A Conduit

•Broker/Dealers & Investors are monetizing losses

–ARS Bonds often sold/exchanged at a discount (high-80s to mid-90s)–Whole loan portfolio sales occur (low- to high- 90s)

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Market (R)Evolution•NFPs/Agencies are exploring different business models

–NFP DL Servicing opportunity, though economics are thin–State-based Fixed Rate Private loan programs are well received by investors–Non-diversified business models face greater challenges

• The Big Guys (SLM/USAF, NNI, Large Banks, TIVAS)

–Many are seeking and achieving market share gains–Continuous focus on cost efficiencies–Increased focus on extracting value

•Legacy Broker Dealers continue to play a significant role

–Continue to hold large ARS and warehouse positions–Broker Dealer financial participation required for most “restructurings”

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Industry Consolidation• Sale of Student Loan Corporation

– $26B of securitized FFELP and servicing rights sold to SLM– Citi Holdings purchases remaining FFELP and Privates– Discover purchases “stock”, thus receiving origination platform and

certain securitized private loans

• Alliance Holdings acquisitions:– Northstar Capital Markets (servicing and admin rights)– Panhandle Plains Servicing (servicing and admin rights)

• CollegeInvest sale of $1.4B FFELP Portfolio to NNI

• Liquidation of $1.8B NextStudent FFELP Trust

• First Marblehead dispositions

2012/3 Market Developments?• Financing “restructurings” and Industry consolidation will continue

– Transaction timing will be uncertain – market, Board timing, regulators

– Companies, business lines and FFELP portfolios will change hands

– High levels of “stuck” collateral in non-term financings

• Dept. of Education’s Policy during FFELP wind down is unclear– DL and NFP Servicing impact

– Guarantors: VFA? Other tracks

• FFELP asset values will remain under par: likely in mid-to-high 90s– Value range will be driven by securitization market spreads

– “legacy” program and thin buyer base will keep prices at or below par

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