SLM

This stock has been one of my bete noirs so to speak. I recommended it in the teens and clearly it has not done well. Various parties have come at around $20 for a runoff scenario on the stock. However this analysis assumes no dilutive capital raise, loss estimates on private student loans that are inline with the past, and clearly a more normal spread between LIBOR and CP.

Do I think SLM will need to raise capital, no. Are there scenarios where they would have to, yes.
The scenario that the market has focused on is the linked to the renewal of the ABCP facility. This facility is due in February and though it is non-recourse, it is over-collaterized. Moreover loans in the portfolio are marked to market, so the need for additional collateral increased in this wild environment. As of last month, according to the company, SLM had 2% of capital against FFELP loans in the facility and 10% vs. private loans. Capital targets for the company as a whole are 50bps vs. FFELP and 8% vs. private loans. Thus if those loans were put back to the banks, it would create a significant capital drain for SLM. Is this likely, no but can it be ruled out completely? In these times nothing is impossible. There is talk of the DOE expanding their CP+50 program to include eligible loans back to the 2003 time period. Such action will allow SLM to refinance loans and shrink the ABCP facility significantly. This would be a positive both from a balance sheet risk perspective as well as from a net interest margin perspective, as the cost of the facility is significant.
SLM also has this purchased paper business (buying distressed paper both mortgage and other), that is in runoff but has led to charges the past two quarters. This should just be an incremental negative, but it does add additional capital strain. On the plus side, capital requirements for this business is high and as the portfolio runs off, capital should be released.
If loss expectations on private student loans deteriorated significantly, a large provision could deplete capital. I think this is the biggest unknown at present. Q3 numbers did see a pick up in delinquencies, and a long recession will certainly cause strain on the portfolio. Private loans are a relatively new product, and there is no historical stress scenario.
There are other issues affecting the company but are more growth oriented ( can the company fund private student loans effectively, what is the future of the FFELP program in a democratic administration, will SLM retain servicing if it puts loans back to the govt). However, these are not really relevant at present given that the stock trades at 50% of a run-off scenario.
Is this stock a buy? Wow, the whole wholesale funded model is in disrepute right now, and I guess having been burned before, I would wait for some tangible progress; namely either a renewal of the ABCP facility or at least an execution of a FFELP ABS transaction. This may mean buying the stock in the mid teens, but that would still leave decent upside, while hopefully providing a clearer understanding of the downside.