By: Marti Adams
We’re launching Community Bank Month here at SecondMarket.
Throughout the month of May, we’re going to be talking a lot about the community bank market. You’ll hear from us about the unique opportunities for investors to buy and sell shares in private community banks, and about how community banks can benefit from our company-controlled model.
Later this month, we’ll release a report detailing the findings of our community bank pilot program that created customized, private liquidity programs for community banks that we launched last February. And we’ll have a couple of cool infographics too.
So stay tuned for more.
And in the meantime, please visit our Community Bank Month page.
Marti Adams is the Public Affairs Manager at SecondMarket.
I admit it, I screwed up. While the transition of SecondMarket from a telephone broker of illiquid assets in 2005 to the technology-driven reinvented stock market that we are today has been quite successful, I have done a poor job managing our cost structure during this transition. As a result, there are a number of high quality, hard-working SecondMarket family members who are now looking for their next challenge.
So what went wrong? Reflecting on the past few years, the biggest mistake that I made was treating our cash in the bank and top line revenue as the ultimate gauge of the health of the company. The problem with that approach is that it helped obfuscate the bloated cost structure that we had in place from the period in our history when our model involved collecting a transaction fee by connecting buyers and sellers. Great business, but not predictable, not very scalable and requires substantial infrastructure costs – regardless of transactional volume.
Today, SecondMarket is solely focused on delivering a robust suite of capital, liquidity and communication tools to issuers (private companies, community banks, funds and student loan issuers). With this more scalable, predictable business model, we have decided to double down on what is working, eliminate any unnecessary costs and get our company back to the lean, mean, high performing organization that we once were before hubris took over. Basically, we need to act more like a startup and less like the large, bloated, slow moving organizations that we’re trying to disrupt.
This cost rationalization process has been gut wrenching for me, stressful on my leadership team and, quite frankly, the worst experience of my professional career. Yet I know it is the right thing to do and it is the right time to do it. Emerging from this process will be a company with over $25 million of cash in the bank, an expected break-even bottom line and a rapidly growing list of companies, banks, funds and student loan issuers that are joining SecondMarket. I remain extremely optimistic about SecondMarket’s future and the important role we plan to play in reinventing the stock market and redefining the modern company.
Finally, as I mentioned, there are a number of fine individuals who are now searching for an opportunity. Smart, capable people who would be an asset to any organization. I encourage those of you looking to add talent to consider welcoming them onto your teams.
Thank you for your continued support and encouragement.
Barry Silbert, Founder & CEO
By Barry Silbert
The public markets are broken. I have been saying this for years.
The public markets have permanently changed and no longer serve the needs of today’s entrepreneurs. Systemic changes to the way business is done on the public exchanges – the dominance of high-frequency trading and the casino-like environment have made it difficult for entrepreneurs and CEOs to implement and execute long-term strategies.
The markets need to be reinvented.
That’s why at SecondMarket, we’ve created a new model that allows private companies to enjoy the benefits of being a public company (access to capital, shareholder liquidity, communication with their shareholders) with the flexibility of a private company. We enable companies to control their futures so they can focus on long-term growth instead of short-term trading activity, or beating quarterly earnings.
Thus, we’re blurring the lines between public and private to create a new category: a SecondMarket company.
On Monday, First Advantage Bank, a boutique bank in Tennessee, announced its plans to leave NASDAQ to become private and join SecondMarket. In the words of Earl Bradley, First Advantage Bank’s CEO: “We have determined, after several years of public trading, that the public stock markets are not ideal for smaller institutions with lower trading volumes. This allows us to maintain all the characteristics of a community bank and give investors the ability to buy and sell shares. As a private institution, we can better focus on our long-term initiatives and growth in our local markets.”
There is only one way to interpret this news: validation of our model.
While First Advantage Bank is just the first company to leave NASDAQ and join SecondMarket, their decision marks the beginning of a new era for community banks and other companies that are looking to regain control by going private. We don’t expect a deluge of public companies to follow a similar course of action to First Advantage. However, it’s not surprising to us that a public company CEO is echoing the sentiment of most of today’s entrepreneurs: life is better as a private company.
Barry Silbert is the Founder and CEO of SecondMarket.
By: Mark Murphy
A Tennessee community bank made a big move today.
First Advantage Bank, located a few miles outside of Nashville, announced this afternoon that it is leaving the NASDAQ stock exchange to join SecondMarket, making it the first company to move from one of the public exchanges to SecondMarket.
Here’s what SecondMarket’s Founder and CEO Barry Silbert had to say about the exciting news:
“Today’s announcement by First Advantage Bank is yet another testament to the fact that the fast-paced, computer-driven nature of today’s public markets simply doesn’t work for many companies and community banks.
“The most innovative banks recognize that leaving the major stock exchanges gives them more flexibility and time to execute strategies and make long-term decisions without compromising the interests of their shareholders. We’ve reinvented the stock market, and by working with SecondMarket, First Advantage will now benefit from the ability to control the structure and frequency of its stock transactions to provide its shareholders with liquidity, source capital, and better communicate with its shareholders.
“We are delighted that First Advantage Bank is joining SecondMarket and look forward to working with bank management to help it reach its full growth potential and break into new markets.”
Tomorrow, we’ll bring you more on why this news is so significant, and what it says about the nature of today’s public markets. Stay tuned.
Mark Murphy is the Executive Vice President of Communications and Public Affairs at SecondMarket.
Following the launch of our new services for student loan issuers, SecondMarket attended the Education Finance Council Annual Membership Meeting in Palm Springs, CA last week. The event continued to be very well attended, with approximately 150 registrants, including representatives from 30 student loan issuers.
Below are the summaries of the key conference sessions:
Life of Loan Default Prevention: Best Practices: Before Repayment
- Gail daMota, Senior Vice President & Chief Operating Officer, Education Finance Council
- Diane Barber, General Counsel, Kentucky Higher Education Student Loan Corporation
- Thomas Graf, Executive Director, Massachusetts Educational Financing Authority
- Steve McCullough, President & CEO, Iowa Student Loan Liquidity Corporation
The conference began with two panels regarding default prevention. Gail daMota quoted some recent statistics regarding student loans, quoting the recent TransUnion study which stated that 86% of all outstanding student loans are federal, and that loan balances for federal loans have nearly doubled since 2007, with delinquencies rising 27%. (For comparison, private student loan balances have risen only 4%, and delinquencies decreased 2%.) Against this backdrop, the panelists spoke, starting with Diane Barber. Barber stressed the need for increased accountability for student retention, graduation and default rates. Heightened awareness regarding delinquency and default prevention is an obvious positive, but much more needs to be done. Schools and servicers need to promote successful repayment to help reach gainful employment mandates. Success, Barber said, hinges on direct personal access and outreach to the students. In her state of Kentucky, her company runs comprehensive financial literacy and money management programs.
Tom Graf spoke next about the program his company runs in Massachusetts. Their model is to advise families to be wise education consumers, from birth to college and after. The key is to make sure that the families are informed borrowers, and to view higher education as an investment. This becomes especially critical when evaluating loan options, and supplemental borrowing becomes necessary. His Massachusetts program entails early college planning (instilling academic and financial preparedness), educational outreach (500 seminars annually reaching 26,000 families) and having a very transparent application process (website outlines various repayment options, with trained counselors and staff to help assist).
Steve McCullough then talked about his program at Iowa, and the particular challenges which the residents of his state face. He mentioned that although Iowa does not have the expensive colleges that Massachusetts does, the average student indebtedness for Iowans ranks 4th in the country, while Massachusetts is 12th. Iowans need immediate, impactful programs to lower student debt, McCullough said. In this effort, Iowa Student Loan introduced the Student Loan Game Plan, which provides students with online tutorials which everyone must take before getting an Iowa private loan. The tutorials contain blunt, honest information on negative consequences over-borrowing, with individualized assessment of ability-to-pay. As a result of this initiative, 17% of borrowers reduced their overall borrowing levels by an average of $2,000, totaling approximately $1 million. In addition, he spoke of the independent Iowa College Access Network, a non-profit that provides free college planning services. He believes that the key to success is to customize overall programs to the constituency of each state.
Life of Loan Default Prevention: Best Practices: Repayment
- Jimmy Parker, Executive Director, Panhandle-Plains Higher Education Authority
- Ray Bayer, Executive Director & CEO, MOHELA
- Eugene Hutchins, CFO, New Jersey Higher Education Student Assistance Authority
- Elena Lubimtsev, Senior Vice President, Edfinancial Services
The second panel focused on what lenders and servicers could do to prevent defaults after the borrower has entered the repayment stage. Jimmy Parker led off by citing figures from The Federal Reserve Bank of NY, such as 40% of borrowers have less than $10,000 in student debt (3.7% have $100,000+) and 35% of borrowers in repayment are more than 90+ days delinquent. Ray Bayer then discussed default prevention and repayment options for Direct Loans, since MOHELA is one of its servicers. He talked in detail about various income-driven repayment (IDR) options. Given the number of borrowers who are currently facing difficulties in repaying loans, many IDR accounts often result in payment of $0. He walked the audience through various standard repayment options (level/graduated/25 year extended, etc.), along with several alternatives (i.e. fixed term, fixed amount, fixed graduated and negative amortization) which require the borrower to show evidence of exceptional circumstance/hardship. He recommends to all servicers to be strict regarding the granting of forbearances, as they tend to be a “band aid” solution. The more permanent and effective solution is to work the borrower into a repayment plan.
The next discussion focused on New Jersey’s private loan program, where Gene Hutchins spoke on his organization’s default aversion tools. He promoted his program’s website (NJCLASS.org) as an easy and fast way to access borrower accounts. The default aversion tools available on the site include payment/delinquency calculators, financial literacy information and access to online forms. They have implemented life-of-loan communications, which include letters to the borrowers prior to them entering repayment (midpoint letters after sophomore year & congratulatory graduation letter). They also have targeted email campaigns based on the repayment option that they selected, and have dialing campaigns for borrowers who have become delinquent.
Finally, Elena Lubimtsev spoke about Edfinancial’s approach, which she described as being a universal cycle. The cycle includes financial literacy (school-based products to help students understand debt), retention (graduation is a key factor in loan performance), early interaction/grace counseling (online entrance/exit interviews are not enough), default prevention/repayment counseling (outreach to delinquent borrowers) and cohort default rate challenges/appeals (only 10% of schools challenge CDR, with 40% success).
Capital Markets: Case Studies of Successful Transactions
- Joe Wood, President, ISM Education Loans
- Grant Carwile, Managing Director, RBC Capital Markets
- Lee Donner, Managing Director, First Southwest Company
- Barbara Thomas, Managing Director, Morgan Stanley
- Mark Weadick, Managing Director, Student Loan Capital Strategies
This panel walked through some of the successful capital markets transactions which we’ve seen in the past year, and some of the features which were unique to each deal. Lee Donner was the first to speak, and he talked about Alaska Student Loan Corporation’s (ASLC) 2012 B-1 and B-2 transactions, completed in September 2012. This transaction was notable due to the involvement of the Department of Revenue of the state of Alaska. The state had passed a law in 2009 to assist ASLC through the difficult financial environment, and the law provided ASLC the option to ask the state for a bridge loan, a standby bond purchase agreement and a line of credit for up to $100 million. To get this transaction completed, ASLC took out a letter of credit from State Street and combined it with a standby bond purchase agreement from the Department of Revenue, whereby the state would buy bonds from State Street based on certain conditions. This transaction would not have gotten done without support from the state.
Grant Carwile covered the Nelnet 2012-2 transaction from June 2012. The interesting aspect of this transaction is that the collateral for the transaction was 100% rehabilitation loans. Typically, such deals are not possible because rating agencies assume an immediate re-default for rehab loans (other issuers tend to mix rehab loans with regular FFELP loans to get them financed). However, Nelnet was able to provide the rating agencies and investors with 10 years of data to get them comfortable. However, even still, the cost of funds were slightly higher for rehab deals rather than traditional, so Nelnet has gone back to mixing FFELP collateral in their transactions.
Barbara Thomas was next, and she discussed the Vermont Student Assistance Corporation’s (VSAC) transactions. There were two separate transactions involved, which were even further complicated as it involved a restructuring of most of VSAC’s outstanding auction-rate securities. It was also worthy of note in that a portion of the bonds were sold in the tax-exempt LIBOR FRN market, an area which is not commonly utilized. Although the starting parity of the 2012-B transaction was very high at 153.6%, VSAC did not have to contribute any cash themselves, as the equity contributed was all from discounted purchase of ARS.
Finally, Mark Weadick talked at length about the Student Loan Finance Corporation transaction and its various complexities. This deal involved collapsing of multiple trusts, ARS restructuring/exchange and significant private loan exposure. The transaction took well over a year to put together and the completion of two separate securitization deals (one each for FFELP and private), but it was finally consummated in November 2012.
Rating Agency Outlook
- Ray Eason, Executive Director, Morgan Stanley
- Jerry Kalmus, Director, Standard & Poor’s
- Tracy Wan, Senior Director, Fitch Ratings
- Jon Riber, Vice President, DBRS
This session was on rating agencies, and some of the topics on which they’re currently focused. The first area covered the practice of rating confirmations/notifications, which has become controversial in the last couple of years. Rating confirmations, something which used to be fairly standard and commonplace whenever an issuer undertook certain corporate or financing actions, is now being viewed in a negative light by regulators, as it makes it appear as though the agencies are working too closely with the issuers. The agencies do not want to be in the business of “approving” actions of issuers. As a result, all 3 firms on the panel no longer issue rating confirmations, with the only exception being matters related to master trusts. Rather, they issue rating notifications and press releases, which issuers tend to use as substitutes.
On the topic of data requirements for new issuances, Tracy Wan talked about how Fitch tries its best to be transparent. They have a list which specifies exactly the data that they need to be able to rate each transaction, with deals involving private loans obviously requiring far more data than FFELP issuances. On these private loan transactions, Wan describes Fitch’s approach as being comprehensive, and they absolutely require static pool data which demonstrates defaults, recoveries and prepayments. S&P’s Jerry Kalmus weighed in next and talked about his firm’s FICO band requirements, and that it matters whether or not the issuer is non-profit or for-profit. S&P mandates 5 years of repayment history, and that anything less will either get rating caps or not get rated at all. He also discussed that as a general rule, S&P needs at least a 103% starting senior parity.
On overall loan performance, Jon Riber from DBRS talked about his firm’s private student loan index and the continued underperformance of the 2007 vintage (2002/2003 pools are performing the best). Defaults in the fourth quarter totaled 1.2% of loans in repayment. For FFELP loans, Wan, using data from Sallie Mae, mentioned that the 2005 vintage has cumulative defaults of 7%, while the 2009 vintage has already reached 10%.
Finally, on the impact that SEC Rule 17g-5 has had on their businesses, Kalmus said that it has led to much less interaction with the issuers. He described the rating process as being more onerous, requiring more sign-offs from more people to bring transactions to completion. They continuously perform sensitivity analyses to make sure that the ratings which they place on transactions remain relatively constant for a certain period of time (i.e. if they were to rate a transaction at a single A level, they want to make sure that it actually remains single A for a while, as opposed to immediate downgrades based on relatively minor performance issues). This is an effort to hopefully make the ratings slightly more reliable.
Capital Markets: Global Economic Overview and Its Impact on Education Lending
- Vince Sampson, President, Education Finance Council
- Judd Deppisch, Director, BMO Capital Markets
- Martin Garcia, Vice President, SecondMarket
- Barbara Lambotte, Senior Vice President, Moody’s Investors Service
- Theresa O’Neill, Managing Director, Bank of America Merrill Lynch
This discussion centered around some of the recent significant economic events and their effects on the student loan industry. Theresa O’Neill from Bank of America talked about the three rounds of the current budget sequester. The first stage was the payroll tax increase which removed $120 billion of disposable income from the economy, which Bank of America expects will negatively impact GDP by 0.4% in Q1. The second stage is the $85 billion reduction in federal spending, which is expected to result in loss of 50,000 jobs in March, 100,000 jobs in April and another 50,000 in June. She expects a -1.5% impact on GDP in Q2. And the third stage will be QE3, which O’Neill said will continue into 2014. Interest rates will remain low, and the government will continue to buy MBS. In regards to student loan securities, she mentioned that they offer lower yield when compared to CLOs, RMBS and CMBS. However, spreads in student loan bonds have continued to compress, particularly on 3-year private loan bonds (90 basis points currently, down 10 basis points since January). In terms of overall issuance, she expects $2.2 trillion of total ABS this year, which will not be enough to replenish the paydown of existing bonds. As a result, she believes that total ABS outstanding will decrease by $160 billion this year, which will continue to fuel the “search for yield” we have seen so far.
Judd Deppisch from BMO spoke next, and he put into focus the relatively small size of the student loan ABS market. Although 2012 ABS issuance was up nearly 58% year-over-year, it represented only 5.5% of overall spread product issuance. And student loan bonds represented only 13% of total ABS bonds. Therefore, Deppisch said, student loans definitely has room to grow as an asset class. He then laid out a near-term calendar related to the federal government budget:
- 03/01: Sequester delay expired, triggering $1.2 trillion in spending cuts over the next 10 years
- 03/27: Continuing resolution expires; need to be resolved in order to avoid shutdown of the U.S. government
- 04/15: Deadline for FY2013 budget blueprint – pay of lawmakers will be withheld if blueprint not passed by this date
- 05/18: Debt ceiling expires – permanent increase in debt ceiling is necessary; treasury can likely maneuver until at least late July
Deppisch continued, talking about how U.S. debt levels are continuing to pile up and that interest costs are growing. Assuming moderate interest rate growth and some levels of declining unemployment, debt-to-GDP ratio will remain around 75% for the next decade. In addition, the direct loan portfolio will reach $1.3 trillion by 2022.
Martin Garcia from SecondMarket was the third speaker on the panel, and he provided commentary on the secondary market impact of these macroeconomic events. He echoed the sentiments that some of the other sessions contained, in that he has seen prices rising and yields tightening across the board in fixed income securities in the last few months. Investors have had to adjust their yield targets down from 10~12% to 7~8%. As traditional ABS products became more expensive, ABS sectors like private student loans and esoteric ABS came more attractive on a relative value basis. As an example, he noted that National Collegiate Student Loan Trust securities, which had historically been a hedge fund product, were recently being bought up by asset managers. Investors have been willing to move down the credit/risk spectrum in order to purchase bonds which yield better returns. Shortage of available bonds currently will likely continue to push prices up in the secondary market.
Moody’s Barbara Lambotte spoke last, and she spoke more about sector performance in the face of these events. She said that autos and credit card performance has been at or below pre-recession levels since 2010~2011. Meanwhile, full recovery of private student loan performance has been slow. Part of the reason for this is that while changes in underwriting criteria tend to affect autos and cards immediately, there is a lag when it comes to student loans as it could take years for loans to reach repayment status. Unemployment rates for young college graduates improved, but still high at 7.7%. Regarding defaults, 2006/2007 vintage private loans have already experienced 18~19% cumulative defaults. However, defaults for non-profit issuer programs are noticeably better than for-profit issuer programs. Post 2008, the average projected cumulative default rate is 10% for non-profit programs and 17% for for-profit programs.
- Vince Sampson, President, Education Finance Council
Vince Sampson from Education Finance Council wrapped up the day and a half event with his update on Washington events. He said that one of the main reasons why nothing is getting done in Washington right now is that there is a struggle between the executive and legislative branches of government. There is also an additional layer of struggles, in that there is some discord between leadership and party rank and file. Additionally, the looming specter of the 2014 midterm elections compresses the legislative calendar. There is the question of whether political will remains to tackle the big issues.
In terms of budget and fiscal issues, sequestration took effect on March 1st. More fiscal fights are ahead, with the 2013 continuing resolution expiring on March 27th and the debt ceiling in May. Regarding 2014 budget and appropriations outlook, the President’s budget is due on April 8th, but Congress will move forward regardless. Appropriations will shrink but questions are how and by how much.
Regarding the direct student loan program, sustainability is starting to be questioned. But right now, it is still the law of the land and servicing is the key area. The non-profit servicers are up and running, and while some of them are still working through implementation issues, most are servicing loans smoothly.
Financial reform still moving at a glacial pace. There are many key rulemakings left undone. However, political climate does not favor a repeal of Dodd-Frank. Finally, regarding tax reform, Sampson is betting that the changes will fall short of the ’86 tax code overhaul. The House Ways & Means Committee has formed working groups, and comments are due by April 15th.
S. Michael Moro
At SecondMarket, our goal is to build a better marketplace for tomorrow’s companies. Although we’re best known for our work in private company stock, SecondMarket has long been the industry leader in facilitating student loan securities transactions, and we’ve used our 40+ years of collective experience to develop outstanding relationships in the student loan community.
Now we’re taking our expertise and creating a better marketplace for issuers of student-loan-backed securities. Whether you’re looking to raise capital, transact in the secondary markets, or communicate with your stakeholders, SecondMarket has the solution:
- Investor Introductions: Student loan bond investors used to consist of a tiny number of Wall Street institutions. Student loan issuers can now access our pool of accredited investors to find new sources of capital at more competitive prices.
- Investor Reporting: Providing regular reporting to investors is a logistical nightmare for issuers. We will streamline the reporting process by distributing through our secure, online SecondMarket platform.
- Issuer Buybacks/Third-Party Purchases: Our experts will use their decades of industry knowledge to guide issuers and investors through the transaction process so they can make smarter purchases and better gauge the market.
- Market Data: We will provide market intelligence to help issuers make informed investment decisions.
Interested in learning more? Make sure to check out our press release, as well as our Q&A section below:
Q&A: SecondMarket’s New Solutions for Student Loan Issuers
- Is SecondMarket making student loans themselves?
- No, we’re not issuing any new student loans to borrowers. We’re working with traditional lenders (non-profit, for-profit and state agencies) to securitize and market their bonds to new investors. In the past, only the biggest Wall Street accounts used to be able to buy student loan ABS in the primary market. Now we’re allowing SecondMarket investors on our platform to invest in ABS, bringing more price competition.
- Are you creating a market for shorting student loans?
- Absolutely not- we’re not providing any options, derivatives, or any other pathway for shorting purposes. We would not get involved in a business that would short student loans. What we’re providing is a way to continue our singular focus on companies and other issuers by opening up new pools of capital to student loan issuers. This means more investors for issuers, and more investment opportunities for investors.
- Is SecondMarket still doing secondary transactions in securities backed by student loans?
- Yes, SecondMarket is still doing secondary transactions. To date, our team has facilitated $6 billion in secondary transactions of student loan-backed securities, and we see that as a significant part of our business going forward.
- Are these bonds available to individual investors?
- While accredited individuals are able to buy these securities, we anticipate that issuers will prefer institutional capital. Issuers and other companies on SecondMarket always control who they want as buyers.
- Is this new product only available to student loan issuers?
- Initially yes, but we believe this full service solution will be attractive to issuers of other types of asset-backed securities.
Many of us have a favorite niche business. Maybe it’s your local chocolatier featuring handmade chocolates, or perhaps it’s your favorite brewery that makes a craft beer found only in your hometown. Whatever it may be, these craft businesses are part of a much larger movement across the country, as American consumers increasingly look past high-volume commodities for more specialized markets.
Instead of focusing on the mass production of basic consumer goods, these entrepreneurs are working to perfect their unique products not found from high-volume producers. Artisanal craftmakers produce a wide array of specialty consumer goods, everything from pickled beets and herb mustard to precision machinery and specialty knives. Burgeoning hotspots like Brooklyn and Baltimore are becoming well-known for cultivating a new generation of entrepreneurs who are dedicated to creating a craft-centered economy.
As a part of SecondMarket’s ongoing initiative to educate investors on unique investment opportunities, we’ve decided to devote February to educating investors about early-stage consumer goods companies. Through a webinar that we co-presented with CircleUp, a leader in connecting high-growth consumer companies with investors, and through our other educational content, we’re providing our investors with the knowledge needed to understand the opportunities created in this growing market.
Be sure to check out our education guide on early-stage consumer goods and learn more about this asset class.