Sallie Mae 2005 Annual Report Download - page 163

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)
F-41
9. Student Loan Securitization (Continued)
Year ended December 31, 2005
(Dollars in millions)
FFELP Stafford and
Other Student
Loan Trusts(5) Consolidation Loan Trusts(5) Private Education Loan Trusts
Fairvalue ofResidual Interest (millions)............... $ 774 $ 483
(4) $ 1,149
Weighted-average life (in years)....................... 2.7 8.0 7.8
Prepayment speed assumptions (annual rate) .......... 10%-20%(2) 6 % 3%
Impact on fair value of 5% absolute increase............ $ (74) $ (98) $ (222)
Impact on fair value of 10% absolute increase........... $ (136) $(169) $ (382)
Expected credit losses (as a% of student loan principal).. .14% .23% 4.74%(3)
Impact on fair value of 5% absolute increase in
default rate....................................... $ (10) $ (4) $ (192)
Impact on fair value of 10% absolute increase in
default rate....................................... $ (19) $ (8) $ (383)
Residual cash flows discount rate ..................... 12.3% 10.3 % 12.4%
Impact on fair value of 5% absolute increase............ $ (63) $ (89) $ (210)
Impact on fair value of 10% absolute increase........... $ (117) $(154) $ (359)
Difference between Asset and Funding
underlying indices(1)
3 month LIBOR forward curve at
December 31, 2005 plus contracted spreads
Impact on fair value of 0.25% absolute increase in funding
index compared to Asset index...................... $ (125) $(109) $ (8)
Impact on fair value of 0.50% absolute increase in funding
index compared to Asset index...................... $ (250) $(217) $ (17)
(1) Student loan assets are primarily indexed to a Treasury bill, commercial paper or a Prime index. Funding within the trust is
primarily indexed to a LIBOR index. Sensitivity analysis increases funding indices as indicated while keeping asset underlying
indices fixed.
(2) 20% in 2006, 15% in 2007 and 10% thereafter.
(3) Although expected credit losses are used to project future cash flows related to the Private Education Loan securitization’s
Residual Interest, the Company, to date, has purchased loans at par from the trust once they default under a contingent call
option, resulting in no loss to the trust nor the related Residual Interest. When delinquent loans are purchased at par from the
trust under the call, the Company records the loan on its balance sheet at fair value and recognizes a loss for the difference
between the par value paid to the trust and the delinquent loan’s fair value. The Company recognized losses of $32 million,
$27 million and $1 million for the
years ended December 31, 2005, 2004 and 2003, respectively, related to this activity. The Company’s Private Education Loan
securitization, which settled in the fourth quarter of 2005, is the first Private Education Loan securitization in which the
Company does not have a contingent call option to purchase defaulted loans from the trust.
(4) Certain consolidation trusts have $1.9 billion of non-U.S. dollar (Euro denominated) bonds outstanding. To convert these non-
U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with highly-rated
counterparties. These swaps are in a $164 million gain position (in the aggregate) as a result of the decline in the exchange rates
between the U.S. dollar and the Euro. This unrealized market value gain is not a part of the fair value of the Residual Interest
in the table above. The derivatives entered into by these trusts do not require the swap counterparties to post collateral to the
respective trust for changes in market value, unless the trust’s swap counterparty’s credit rating has been withdrawn or has been
downgraded below a certain level. If the swap counterparty does not post the required collateral or is downgraded further, the
counterparty must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an
entity that has the required credit ratings. Ultimately, the Company’s exposure related to a swap counterparty failing to make its
payments is limited to the fair value of the related trust’s Residual Interest which was $309 million as of December 31, 2005.
(5) In addition to the assumptions in the table above, the Company also projects the reduction in distributions that will result from
the various benefit programs that exist related to consecutive on-time payments by borrowers. Related to the entire $2.4 million
Residual Interest there is $128 million (present value) of benefits projected which reduce the fair value.