04/23/2010

Deutsche Takes Aim at Student-Loan Assets

Deutsche Bank intends to expand its role in the student-loan industry - both by purchasing an education lender and by picking up loan portfolios from companies that plan to exit the rapidly evolving marketplace.

As the Obama Administration moves closer to killing subsidies offered via the Federal Family Educational Loan Program, all but a handful of companies are expected to get out of the education-funding business over the next 18 months. That, in turn, should lead to a wave of acquisitions in which large banks and finance shops would increasingly step in to manage sizable loan portfolios.

Some $250 billion of student loans are already estimated to be on the block. Most are FFELP loans. Unsubsidized private credits are also in the mix.

In addition to Deutsche, Bank of America and J.P. Morgan are interested in increasing their presence in the education-lending arena. Among lenders, Sallie Mae and Nelnet have also indicated they want to increase their market shares as smaller players pull back.

The elimination of FFELP means the U.S. Department of Education will become the sole issuer of government-guaranteed student loans. A small percentage of lenders are responding by shifting their focus to private loans. But other than four shops that have received contracts to service government pools - Sallie Mae, Nelnet, Great Lakes Education and Pennsylvania Higher Education Authority - most others will likely sell their portfolios and get out of the business. "If you're a bank with a $10 billion servicing portfolio that's in runoff, you're asking yourself, 'What the heck are we going to do with the stuff?' - especially if you don't have the scale to continue funding the servicing effort," one equity analyst said. "The answer is, unload it."

Deutsche sees the market shakeup as a perfect opportunity to parlay its experience as an underwriter of student-loan securitizations into a more active presence in education finance. The bank has been among the market's most active bookrunners of student-loan bonds since entering the sector in 2000, with $109 billion of such assignments under its belt, according to Asset-Backed Alert's ABS Database. Recently, it has been working with struggling lender First Marblehead on a novel securitization of yet-to-be-originated loans.

By acquiring an education lender with an ongoing business, Deutsche would position itself to expand beyond underwriting to issuing. By snapping up student-loan portfolios, the bank would reap two benefits: earning servicing fees and, once the credits are securitized, pocketing residual cashflows. "It makes a lot of sense," one market player said of the bank's strategy. "Deutsche knows the market and it's been looking to enhance its market share."

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