Monday, April 26, 2010

First Marblehead recovers from a bump

Investing in FMD takes pure guts! (Or just faith in the vampire squid)

FMD has $422m cash ($380m market cap) and a $15m quarterly burn rate. Yet it has no real income because it was forced to stop all banking transactions because of it's capitalization levels and loan guarantees. It continues to take shrinking losses on that previous portfolio. The government lifted the cease and desist order on their bank subsidiary after they sold off their complete student loan portfolio at a sizable loss. So now they can get back into the business in a much better market climate than before.

For me, it is impossible to believe that the private student loan securitization market is permanently impaired. There is plenty of supply of private student loans to be made out there. There is plenty of demand for it from investors due to the strict recovery provisions. FMD servicing capibilities have proven to decrease default rates and increase recovery rates, crucial for student loan securitization investment returns.

A first peek of sunlight is a recent agreement with Sun Trust to perform $200m worth of loan processing, production support, program support and portfolio management, and program administration services. There is no timeframe yet in regards when they will execute this program.

So I think there is a market for them, it just has not reemerged yet. Others have made this bet before, but have yet to realize a return. But with the recent SunTrust deal, real revenues are on the horizon.

Finally, I can say all of these wonderful things, strike them, and still say the fact that Goldman invested $1B in private equity and has a vested interest in seeing a return on that investment is a good enough reason to dabble in FMD. Does anyone have a doubt about Goldman's ability to find a profit, ethical or not? I did not think so.

The author is long at $3.57.


Lockstep said...

FMD, although it has fallen steadily, has recently just tracked with the broader market fall. I will double the position at $2.1, when it gets there.

The current market cap is below the net cash on hand. This is a strong value play, with potential growth upside in a few years.

Lockstep said...

This has proven to be a very speculative position. Hopefully the private student loan market sustains itself enough to allow FMD to start profiting again.

After some investigation, I have learned at student loans at low end, for profit universities tend to have much higher default rates than other colleges. If I find out that SunTrust, via FMD, is lending to these institutions I will adjust my position on this stock.

Lockstep said...

No movement in the student loan market. Also, for profit colleges preying on the unsophisticated borrowers make student loan servicing a difficult place to be. I closed my position here at $2.26 and took my loss. There is easier money elsewhere.


Sounds classy the name that is marbelhead.