Sallie Mae 2013 Annual Report Download - page 27

more susceptible to market fluctuations and other adverse events than if it were still a part of the
Company; (c) following the Spin-Off, SLM BankCo’s business will be less diversified than our business
prior to the Spin-Off; and (d) other actions required to separate SLM BankCo’s and NewCo’s respective
businesses could disrupt SLM BankCo’s operations. For additional information, see Item 1A. “Risk
Factors—Risks Related to the Spin-Off.”
•Limitations placed upon NewCo and SLM BankCo as a result of the tax sharing agreement. To preserve
the tax-free treatment to the Company of the Spin-Off, under the tax sharing agreement that NewCo will
enter into with SLM BankCo, both SLM BankCo and NewCo will be restricted from taking any action
that prevents the distribution and related transactions from being tax-free for U.S. federal income tax
purposes. These restrictions could limit both SLM BankCo’s and NewCo’s near–term ability to
repurchase its respective shares or to issue additional shares, pursue strategic transactions or engage in
other transactions that might increase the value of its respective businesses. For additional information,
see Item 1A “Risk Factors—Risks Related to the Spin-Off.”
Our Board of Directors concluded that the potential benefits of the Spin-Off outweighed these negative
factors.
NewCo After the Spin-Off
Following completion of the Spin-Off, NewCo will hold the largest portfolio of education loans insured or
guaranteed under FFELP Loans, as well as the largest portfolio of Private Education Loans. FFELP Loans are
insured or guaranteed by state or not-for-profit agencies and are also protected by contractual rights to recovery
from the United States pursuant to guaranty agreements among ED and these agencies. Private Education Loans
are education loans to students or their families that are non-federal loans and not insured or guaranteed under
FFELP. Private Education Loans bear the full credit risk of the customer and any cosigner and are made
primarily to bridge the gap between the cost of higher education and the amount funded through financial aid,
federal loans or students’ and families’ resources. As of December 31, 2013, approximately 85 percent of the
FFELP Loans and 60 percent of the Private Education Loans held by NewCo were funded to term with non-
recourse, long-term securitization debt through the use of securitization trusts.
NewCo will service and collect on its own portfolio of education loans, as well as on those owned by ED,
financial institutions, banks, credit unions and non-profit education lenders. It will also provide servicing support
for Guarantor agencies, which serve as intermediaries between the U.S. federal government and FFELP lenders
and are responsible for paying claims on defaulted FFELP Loans. These services include account maintenance,
default aversion, post default collections and claim processing. NewCo will also be one of four large servicers to
ED under its DSLP, and will provide collection services to ED. NewCo will also generate revenue through
collection of delinquent debt (consisting of both education loans as well as other asset classes) on behalf of its
clients on a contingent basis. In addition, NewCo will service and collect on SLM BankCo’s portfolio of FFELP
Loans and, during a transition period, SLM BankCo’s portfolio of Private Education Loans. It is currently
anticipated that NewCo will continue to service Private Education Loans owned by SLM BankCo with respect to
individual borrowers who also have Private Education Loans which are owned by NewCo.
In 2010, Congress passed legislation ending the origination of education loans under the FFELP program.
FFELP Loans that remain outstanding will amortize over approximately the next 20 years, and NewCo’s goal is
to maximize the cash flow generated by its FFELP Loan portfolio, including by acquiring additional FFELP
Loans from third parties and expanding its related servicing business.
As of December 31, 2013, on a pro forma basis, NewCo’s principal assets consisted of:
• $103.2 billion in FFELP Loans, which yield an average of 2.05 percent annually on a “Core Earnings”
basis and have a weighted average life of 7.6 years;
25