Sallie Mae 2011 Annual Report Download - page 77

Liquidity and Capital Resources
Funding and Liquidity Risk Management
The following “Liquidity and Capital Resources” discussion concentrates on our Consumer Lending and
FFELP Loans segments. Our Business Services and Other segments require minimal capital.
We define liquidity risk as the potential inability to meet our contractual and contingent financial
obligations as they come due, as well as the potential inability to fund Private Education Loan originations. Our
primary liquidity objective is to ensure our ongoing ability to meet our funding needs for our businesses
throughout market cycles, including during periods of financial stress. Our two primary liquidity needs are
funding the originations of Private Education Loans and retiring unsecured debt upon maturity. To achieve that
objective we analyze and monitor our liquidity needs, maintain excess liquidity and access diverse funding
sources including the issuance of unsecured debt, the issuance of secured debt primarily through asset backed
securitizations and/or other financing facilities and through deposits at Sallie Mae Bank (“the Bank”), our Utah
industrial bank subsidiary.
We define liquidity as cash and high-quality liquid securities that we can use to meet our funding
requirements as they arise. Our primary liquidity risk relates to our ability to fund new originations and raise
replacement funding at a reasonable cost as our unsecured debt matures. In addition, we must continue to obtain
funding at reasonable rates to meet our other business obligations and to continue to grow our business. Key risks
associated with our liquidity relate to our ability to access the capital markets and access them at reasonable
rates. This ability may be affected by our credit ratings, as well as the overall availability of funding sources in
the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in
certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.
Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change
from time to time based on our financial performance, industry dynamics and other factors. Other factors that
influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our
relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of
earnings, corporate governance and risk management policies, capital position and capital management practices. A
negative change in our credit rating could have a negative effect on our liquidity because it would raise the cost and
availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral
on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that
we can continue to efficiently access the capital markets even in difficult economic and market conditions.
Recent market volatility has elevated the potential cost of capital markets issuance. Regardless, we continue
to expect to fund our ongoing liquidity needs, including the origination of new Private Education Loans and the
repayment of $1.8 billion of senior unsecured notes to mature in 2012, primarily through our current cash and
investment position and the collection of additional bank deposits, the very predictable operating cash flows
provided by earnings and repayment of principal on unencumbered student loan assets and distributions from our
securitization trusts (including servicing fees which are priority payments within the trusts). We may also draw
down on FFELP ABCP Facilities and the facility with the Federal Home Loan Bank in Des Moines (the
“FHLB-DM Facility”); and we may also issue term ABS and unsecured debt.
Currently, new Private Education Loan originations are initially funded through deposits and subsequently
securitized to term on a programmatic basis. We have $1.5 billion of cash at the Bank as of December 31, 2011
available to fund future originations. We no longer originate FFELP Loans and therefore no longer have liquidity
requirements for new FFELP Loan originations.
The acquisition of loan portfolios may require additional funding. Additionally, it is our intent to refinance,
primarily through securitizations, the FFELP Loans that are currently in the ED Conduit Program by its January
2014 maturity date. We currently have $21.4 billion of collateral in the ED Conduit Program. While the assets in
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