First Marblehead’s Latest Securitization- More Cash Up Front

First Marblehead(FMD) is one of those stocks that people either love(First Marblehead: A Bull’s Thorough Defense) or hate(First Marblehead Proves Us Right). Count me in the love category.

The company announced today updated details on its upcoming securitization of student loans. The total loan volume being securitized has increased to an estimated $1.84 billion up from last week’s estimate of $1.56 billion. Much more interestingly, the company estimated that its up-front structural advisory fee would be $175 million or 12.6% of loan volume. Previous securitizations had consistently yielded up-front fees totaling approximately 8% of loan volume. What’s happening here?

It looks like the company has structured this deal to give them more cash up-front and less in the future. In past securitizations, additional structural fees have been about 1.5% of loan volume, and residual revenue has been discounted to around 7.5% of loan volume. Though the discounted value has been recognized as earnings, no cash is received for these revenue streams until 5-6 years after close. The company has not given guidance on those values for this loan and it seems likely that they will be lower than in the past to compensate for the huge increase in up-front revenue.

Taking more of the money up-front has several important benefits. Restructuring these deals to allow for more money up-front dramatically improves cash flow without impacting earnings and introduces more certainty into the company’s balance sheet as it becomes less dependent on present value of future residuals. This addresses some of the persistent complaints of critics who contended that First Marblehead’s estimates of residual revenue were inaccurate and inflated earnings.

First Marblehead has consistently and strongly grown revenue and earnings. The company has been making excellent progress signing up new partners like GE and National City to reduce its dependence on a handful of large partners. It is also awaiting approval for its bid to purchase a small bank which would allow it to expand the array of services offered. The stock has a reasonable valuation with a P/E of 12.5 against fiscal ’07 numbers. There is currently a 1.1% yield and management has raised the dividend as earnings have grown. Despite more than doubling over the past year, I believe this stock still has ample room to continue its upward march.

Disclosure: I hold a position in FMD stock