Sallie Mae 2008 Annual Report Download - page 89

LIQUIDITY AND CAPITAL RESOURCES
The following “LIQUIDITY AND CAPITAL RESOURCES” discussion concentrates on our Lending
business segment. Our APG contingency collections and Corporate and Other business segments are not
capital intensive businesses and as such, a minimal amount of debt capital is allocated to these segments.
Historically, we funded new loan originations with a combination of unsecured debt and student loan
asset-backed securities. Following the Proposed Merger announcement in April 2007, we temporarily
suspended issuance of unsecured debt and began funding loan originations primarily through the issuance of
student loan asset-backed securities and secured student loan financing facilities. In June 2008, the Company
re-entered the corporate bond market with a $2.5 billion issue of 10-year senior unsecured notes. In August
2008, we began funding new FFELP Stafford and PLUS student loan originations for AY 2008-2009 pursuant
to ED’s Loan Participation Program, as described below. During the fourth quarter of 2008, the Company
began retaining its Private Education Loan originations in our banking subsidiary, Sallie Mae Bank, and
funding these assets with term bank deposits. In the near term, we expect to continue to use ED’s Purchase
and Participation Programs to fund future FFELP Stafford and PLUS loan originations and to use deposits to
fund Private Education Loan originations. We plan to use term asset-backed securities, asset-backed financing
facilities, cash flow provided by earnings and repayment of principal on our unencumbered student loan assets,
as well as other sources, to refinance maturing debt and provide cash for operations and other needs.
ED Funding Programs
In August 2008, ED implemented the Loan Purchase Commitment Program (“Purchase Program”) and
the Loan Participation Program (“Participation Program”) pursuant to ECASLA. Under the Purchase Program,
ED purchases eligible FFELP loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the
one-percent origination fee paid to ED, and (iv) a fixed amount of $75 per loan. Under the Participation
Program, ED provides interim short-term liquidity to FFELP lenders by purchasing participation interests in
pools of FFELP loans. FFELP lenders are charged at a rate of commercial paper plus 0.50 percent on the
principal amount of participation interests outstanding. Loans funded under the Participation Program must be
either refinanced by the lender or sold to ED pursuant to the Purchase Program prior to its expiration on
September 30, 2009. Given the state of the credit markets, we currently expect to sell all of the loans we fund
under the Participation Program to ED on or before the program’s expiration date. Loans eligible for the
Participation or Purchase Programs were originally limited to FFELP Stafford or PLUS, first disbursed
between May 1, 2008 and July 1, 2009, with no ongoing borrower benefits, other than permitted rate
reductions of 0.25 percent for automatic payment processing. On October 7, 2008, legislation was enacted
extending ED’s authority to address FFELP Stafford and PLUS loans made for AY’s 2009-2010, and allowing
for the extension of ED’s Purchase and Participation Programs from September 30, 2009 to September 30,
2010. On November 8, 2008, ED formally announced new purchase and participation programs which cover
eligible loans originated for the AY 2009-2010. On January 15, 2009, ED announced that the terms of the
programs for AY 2009-2010 will replicate in all material respects the terms of the programs for AY
2008-2009.
On August 14, 2008, the Company received its initial advance under the Participation Program. As of
December 31, 2008, the Company had $7.4 billion of advances outstanding under the Participation Program.
The Company is classifying all loans eligible to be sold to ED under the Purchase Program as
held-for-sale. Held-for-sale loans are carried at the lower of cost or market with no premium amortization or
provision expenses. At December 31, 2008, the Company had approximately $8.0 billion of FFELP loans
classified as held-for-sale related to this program. These loans are included in the “FFELP Stafford Loans
Held-for-Sale” line on the consolidated balance sheets.
Also pursuant to ECASLA, on January 15, 2009, ED published summary terms under which it will
purchase eligible FFELP Stafford and PLUS loans from a conduit vehicle established to provide funding for
eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first
disbursed on or after October 1, 2003, but not later than June 30, 2009, and fully disbursed before June 30,
2009, and meet certain other requirements including with respect to borrower benefits. Funding for the ED
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