Sallie Mae 2007 Annual Report Download - page 103

The Company assessed the appropriateness of the current risk premium, which is added to the risk free
rate, for the purpose of arriving at a discount rate in light of the current economic and credit uncertainty that
exists in the market as of December 31, 2007. This discount rate is applied to the projected cash flows to
arrive at a fair value representative of the current economic conditions. The Company increased the risk
premium by 100 basis points (to LIBOR plus 850 basis points) to better take into account the current level of
cash flow uncertainty and lack of liquidity that exists with the Private Education Residual Interests. During
2007, the Company increased its loan loss allowance related to the non-traditional or higher-risk loans within
our Private Education Loan portfolio that the Company does not generally securitize. As a result, the Company
does not expect the default rates used for the Residual Interest valuations to correspond with the expected
default rates contemplated by the provision expense related to the non-traditional Private Education Loans
recorded in 2007.
CONTRACTUAL CASH OBLIGATIONS
The following table provides a summary of our obligations associated with long-term notes and equity
forward contracts at December 31, 2007. For further discussion of these obligations, see Note 8, “Long-Term
Borrowings,” Note 10, “Derivative Financial Instruments,” and Note 12, “Stockholders’ Equity,” to the
consolidated financial statements.
1 Year
or Less
2to3
Years
4to5
Years
Over
5 Years Total
Long-term notes
(1)(2)
.................. $6,841 $27,090 $20,461 $53,000 $107,392
Equity forward contract
(3)
.............. 865 — — — 865
Total contractual cash obligations ........ $7,706 $27,090 $20,461 $53,000 $108,257
(1)
Only includes principal obligations and specifically excludes SFAS No. 133 derivative market value adjustments of $3.7 billion
for long-term notes.
(2)
Includes Financial Interpretation (“FIN”) No. 46 long-term beneficial interests of $68.1 billion of notes issued by consolidated
variable interest entities in conjunction with our on-balance sheet securitization transactions and included in long-term notes in
the consolidated balance sheet. Timing of obligations is estimated based on the Company’s current projection of prepayment
speeds of the securitized assets.
(3)
Includes remaining balance of equity forward contract paid to Citibank on January 9, 2008. The Company has no outstanding
equity forward positions outstanding after the contract settlement on January 9, 2008. See Note 12, “Stockholders’ Equity,” to
the consolidated financial statements.
OFF-BALANCE SHEET LENDING ARRANGEMENTS
The following table summarizes the contractual amounts related to off-balance sheet lending related
financial instruments at December 31, 2007.
1 Year
or Less
2to3
Years
4to5
Years
Over
5 Years Total
Lines of credit ............................. $486 $1,350 $200 $ — $2,036
We have issued lending-related financial instruments including lines of credit to meet the financing needs
of our customers. The contractual amount of these financial instruments represents the maximum possible
credit risk should the counterparty draw down the commitment and the counterparty subsequently fails to
perform according to the terms of our contract. The remaining total contractual amount available to be
borrowed under these commitments is $2.0 billion. We do not believe that these instruments are representative
of our actual future credit exposure or funding requirements. To the extent that the lines of credit are drawn
upon, the balance outstanding is collateralized by student loans. At December 31, 2007, draws on lines of
credit were approximately $379 million, and are reflected in other loans in the consolidated balance sheet. For
additional information, see Note 17, “Commitments, Contingencies and Guarantees,” to the consolidated
financial statements.
The Company maintains forward contracts to purchase loans from our lending partners at contractual
prices. These contracts typically have a maximum amount we are committed to buy, but lack a fixed or
determinable amount as it ultimately is based on the lending partner’s origination activity. FFELP forward
purchase contracts typically contain language relieving us of most of our responsibilities under the contract
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