First Marblehead plunges on partner's bankruptcy filing
Shares in First Marblehead Corp. plunged 37 percent yesterday after a key partner of the Boston company sought bankruptcy protection, the latest sign of turmoil besetting the business of private student loans.
First Marblehead has been among the companies hardest hit in the credit crunch, which has made many investors reluctant to buy securities it sells backed by student loans. Its stock has fallen 89 percent since last April.
Yesterday's decline came after First Marblehead's Boston partner, The Education Resources Institute, or TERI, sought bankruptcy protection late on Monday, citing volatile markets and a slowing economy.
TERI had guaranteed First Marblehead's clients loans against default. Even though, in practice, the nonprofit TERI couldn't assure all of First Marblehead's portfolio, TERI's bankruptcy filing was "really a second blow to First Marblehead," said Robert Shireman, the president of the Institute for College Access & Success, a Washington, D.C., advocacy group for student lending.
A First Marblehead spokeswoman said executives wouldn't grant interviews yesterday. In a statement, First Marblehead chief executive Jack Kopnisky said his company is analyzing the bankruptcy filling's implications on its lenders, investors, and borrowers, and that it aims to continue processing and securitizing loans. "The company is working diligently on securing an alternative guarantor as well as structural solutions for loan default guarantees" for future lending, he said.
Outside the company, many expect TERI's bankruptcy to add to the pressure on private student loans, used by many students in addition to loans directly from the government. The private loans are growing more expensive this year as many providers charge higher rates to attract investors, and 32 companies have stopped making student loans altogether, according to a count by Massachusetts Secretary of State William F. Galvin. In a statement yesterday, Galvin said TERI's bankruptcy showed the need for proposed reforms such as one that would allow the US Department of Education to buy loans from lenders in need of new capital.
"Student loan lenders, like many mortgage lenders, got caught up in the rampant - and in many respects, unregulated - securitization of student loans and sold them into markets which at first grew at a frenzied pace but have now frozen," Galvin said.
Created in 1985, TERI has 65 full-time and 22 part-time staffers, according to bankruptcy papers. In 2001 First Marblehead bought TERI's loan processing operations, and struck a series of deals to arrange student loans for various bank lenders such as Bank of America Corp. and Citigroup Inc. In all TERI guaranteed $4 billion worth of loans last year, the majority for First Marblehead.
But lately demand for bonds backed by student loans has "evaporated," according to the filing, drying up First Marblehead's business. This in turn cut TERI's revenue just as a slowing economy has boosted the student-loan default rate and raised TERI's costs, said TERI chief executive Willis J. Hulings III in an interview yesterday.
TERI intends to emerge from bankruptcy intact, he added, and will keep running other programs including financial aid education programs in Boston and Brockton public schools, he added.
In a note to investors, Friedman, Billings Ramsey & Co. analyst Matt Snowling yesterday reiterated his "underperform" rating on First Marblehead because TERI's bankruptcy shifts losses back to the company.
Ross Kerber can be reached at kerber@globe.com.
