First Marblehead: Big Deal, Fat Margins

Liquidity crunch? What's that?

First Marblehead's (FMD) latest securitization, completed Monday morning, is a home run. Under the best-case scenario, I expect the company will generate a gain-on-sale margin of 15.8%; under the worst case, 14.5%. Either way, the results are a great validation of the strength in Marblehead’s securitization program and the strength of this underlying collateral. The results of the deal should enable the company to blow away the consensus E.P.S. expectation for the quarter of $1.06, and should also beat the prior peak fiscal first quarter estimate of $1.60, from back in March of 2007.

Key Points

Pricing Looks Great. Upfront fees came in at 8.7% ($177.1 million, or $1.10 per share after tax.) The company also indicated that the upfront fees will be “more than 55% of the deal.” That implies total GOS of 15.8%, assuming 55% exactly. If the upfront fees come to 60% of the deal--the likely worst case--total GOS will be 14.5%. This is unbelievably good considering the deal was done in the midst of a mostly paralyzed securitization market. And this isn't a small deal, either: it's the biggest securitization of any asset class since July 30th.

Term LIBOR Demand Slightly Better Than Expected. The deal was initially being structured with roughly $1.3 billion in term LIBOR bonds, and ended up with $1.4 billion in term LIBOR bonds being issued. This is not a huge deal, but it is a sign demand was slightly better than expected.

A Very Big Deal. Don't forget, too, that volumes were off the charts. The $2.04 billion worth of loans sold is 30% more than most analysts expected before the liquidity crunch recently caused them to trim their estimates. This is a good sign, I believe, that loan volumes at Marblehead are running well above even the most bullish estimates.

Disclosure: Author has a position in First Marblehead