Marblehead Offering to Fill Warehouse Void

First Marblehead is working on a novel securitization backed by yet-to-be originated student loans.

Deutsche Bank is helping the Boston lender arrange the transaction, which would aim to address a conundrum facing issuers in a range of asset classes: How do they raise enough capital to expand their businesses when banks won't offer them credit lines at affordable interest rates?

Typically, a student-loan company might use a warehouse facility to build up an inventory of loans that it would then securitize. But with banks reluctant to write lines of credit these days, First Marblehead is skipping right to the securitization phase of its funding strategy. To that end, its deal serves as something of a cross between a warehouse line and a traditional asset-backed securities issue.

The transaction resembles a $50 million bond sale completed March 25 by Consumer Portfolio Services, a subprime auto lender in Irvine, Calif. In that privately placed deal, arranged by Cohen & Co., investors paid Consumer Portfolio up front based on a promise that the company would write the underlying loans according to certain parameters by yearend. Once all the receivables are in place, the securities will begin to amortize.

By the time the deal closed, Consumer Portfolio had accumulated enough collateral to support $9.1 million of securities.

While First Marblehead and Consumer Portfolio operate in different asset classes, they share a common thread: a history of relying on securitization for funding. First Marblehead was once among the most active issuers of student-loan bonds, distributing, for example, $5.2 billion of the instruments in 2007. But regulatory pressures and the onset of the global credit crisis forced it to halt its issuance program later that year, and it has been looking for a way back into the market ever since.

The planned deal would also mark a turning point in First Marblehead's broader business. In the past, the company acted as a middleman that helped schools set up lending programs and then fund their receivables through securitization. But it set out to begin lending directly to students with its 2006 purchase of Union Federal Savings - and, after a few fits and starts in those efforts, the upcoming securitization would be backed by some of the first of the resulting credits.

Unlike most education lenders, First Marblehead has always focused on so-called private loans - those without government subsidies offered under the Federal Family Education Loan Program. With the Obama Administration now moving forward with a plan to end FFELP support, many other education-finance shops are also turning their attention to private credits.

Deutsche, meanwhile, has been working on a number of private-loan securitizations. In one recent deal, Affiliated Loan Program for Students, the bank privately raised capital for loans to University of Chicago students. In another, Peaks Private Student Loan Program, it financed loans to ITT Educational Services students. The schools took first-loss positions in each of those transactions, with Access Group servicing and managing the underlying receivables.

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