Unique Education Lender Sets Lofty Outlook

A startup education lender with a novel business strategy is developing an ambitious securitization plan.

Social Finance expects to launch its asset-backed bond program with a $100 million offering as early as May 1. Multiple transactions adding up to $350 million would follow by yearend. From there, the San Francisco outfit sees itself completing $800 million of securitizations in 2013 — en route to an eventual annual output of more than $1 billion.

Social Finance follows a unique approach in which it raises money from alumni of top business schools and uses that capital to write loans to the institutions’ students. It started by lining up $2 million from graduates of Stanford University late last year, and since has set up operations at 40 colleges nationwide.

The company’s business encompasses two components: one in which it expects to write $150 million of loans this year to cover borrowers’ current tuition needs, and a consolidation-loan program with an anticipated 2012 volume of $350 million. The consolidation loans, offered to recent business-school graduates, would account for most of the collateral for the early securitizations.

The alumni-based lending model would eventually dovetail with Social Finance’s securitization plans, with the firm extracting profits by retaining junior interests in the transactions while distributing mezzanine pieces to its graduate backers. Any senior notes would go to outside investors. In fact, banks already are lined up to buy some of the top securities from the first deal.

Given the unfamiliar nature of its loans, Social Finance’s initial securitizations would be unrated. The firm is aiming for 2013 to begin issuing rated deals.

Social Finance was founded by Mike Cagney, who also started hedge fund shop Cabezon Capital. Helping him to set up the company’s securitization program is KKR Financial co-founder Saturnino “Nino” Fanlo. The two worked together in the 1990s at Wells Fargo, where Fanlo created a structured-product investment group. They were in New York this week to line up warehouse funding and possible underwriters for Social Finance’s efforts.

For the first year, Social Finance’s consolidation-loan program will be limited to graduates of the business schools at Harvard University, MIT, Northwestern University, Stanford and the University of Pennsylvania. Later, it plans to expand the financing to graduates of the rest of the schools in its network, including Carnegie Mellon University, Columbia University, Dartmouth College, Georgetown University, Princeton University, UCLA, Vanderbilt University and Yale University.

Cagney said the key to Social Finance’s strategy is the community of alumni that back its efforts. That’s because in addition to supplying low-cost seed capital, they help borrowers land jobs — and create social pressure to repay the debts, thanks to performance updates. A broker-dealer affiliate, SoFi Securities, has a representative stationed at each school to work with the alumni investors.

Borrowers can receive interest rates as low as 6% without a co-signer. Alumni lenders can expect yields of 5-8%.

Back Print