ValueSlant Posted June 29, 2011 Share Posted June 29, 2011 NNI (Nelnet) seems interesting. They are one of the largest student lenders in the country. They lent under the FFEL program of government guaranteed loans that was eliminated (for issuing new loans) in 2010. NNI has been transitioning from a lender to a provider of a bunch of educational services (loan servicing, tuition payment processing, enrollment marketing), but they are still holding a $24 billion loan portfolio. So they really have two distinct segments, but it seems like the value of each segment is getting obscured by the confusing nature of the combined entity. Just on the face of it looks cheap at 5.7X TTM earnings and 1.1 times BV, although these might be basically boom earnings based on the low interest rate environment and loan portfolio is effectively in run off. On the credit side they are very conservative- the loans are 97% guaranteed by the government and then securitized in ABS transactions to match maturities of assets and liabilities. Seems to me the key risk in the name is a spike in interest rates- many of their loans have hit a fixed rate floor, but their interest expense is all variable. If interest rates spike their interest spread will contract and earnings will take a big hit from current levels. On what they call the "fee-based" (service) side- they have grown the business nicely in a short time. Risk I see is that a big chunk of the revenues on that side still come from servicing FFELP loans, which again are in run off. They will have to replace that business with government loan servicing which is more competitive (they are servicing all their own loans now) and lower margin. I think the business is very interesting b/c loan portfolio seems pretty safe albeit earnings could swing wildly with rates and the attractive recurring revenue, low capex service business is almost an afterthought you are picking up for pretty cheap. I would still like the business somewhat cheaper- to really get the service business for almost free. I got more into the nitty gritty in this post: http://valueslant.com/2011/06/28/nelnet-nni-two-businesses-for-price-of-one/ Curious to hear any thoughts. ValueSlant valueslant.com Link to comment Share on other sites More sharing options...
ritrading Posted October 12, 2015 Share Posted October 12, 2015 I've been trying to do some research on NNI lately. It's looking very attractive based on my limited understanding. https://www.sec.gov/Archives/edgar/data/1258602/000125860215000019/nni-123114x10k.htm The expected rates of returns Based on Net Income / Market Value: 19% Based on FCF / Market Value: 23% Page F-20: They own a 28BN portfolio of FFELP student loans, most of which has been funded by securitizing notes to match the maturities. I see 2 large known downside risks. One is that there is only a 97% guarantee by the government on these loans. 84% of the loan portfolio in repayment status is current, and the rest is delinquent. NNI stands to lose about 109M from the 3% which is not reimbursed by the government. The other downside risk is that FFELP are no longer being issued, meaning NNI will run into more difficulty expanding their loan portfolio. This will be offset by the government's Direct Loans program, for which NNI is one of the 4 servicers. NNI will receive a fee for servicing the loans, and will no longer bear any risk of holding the loans. I don't know how much this offset will be. Page 40: The table seems to imply that student loan rates are made up of a variable and a fixed portion, resulting in a (I'm guessing a weighted) net rate of 1.48%. Using this number against their 28B portfolio results in 414M, which matches pretty closely with the 427M net interest income stated on their income statement. Assuming everything is accurate, NNI seems like they have a pretty good setup. They're under very little interest rate risk if their loans are funded by ABS's of approximately matching maturities. Has anyone else been looking into this? Link to comment Share on other sites More sharing options...
jawn619 Posted October 12, 2015 Share Posted October 12, 2015 Very interesting. How do you guys think about the likelihood of students paying back their loans in the future? Link to comment Share on other sites More sharing options...
ritrading Posted October 12, 2015 Share Posted October 12, 2015 The data is very interesting. 83.5% of the loans are current, meaning 16.5% of the loans are delinquent. Theoretically, that means student loan interest rates should be at least 16.5% in aggregate to break even for the losses. I suspect that if you broke down the loans by major, you'd see much lower default rates for majors involving learning skills, and much higher default rates for party majors. Link to comment Share on other sites More sharing options...
jawn619 Posted October 12, 2015 Share Posted October 12, 2015 The data is very interesting. 83.5% of the loans are current, meaning 16.5% of the loans are delinquent. Theoretically, that means student loan interest rates should be at least 16.5% in aggregate to break even for the losses. I suspect that if you broke down the loans by major, you'd see much lower default rates for majors involving learning skills, and much higher default rates for party majors. I thought about it like this. They have about $28B of student loans. Multiply that number by what you think the percentage of current loans going forward will be. Say 65-83.5%. It seems like they charge around 6% interest on these loans so you get an income stream from that. Then the interest expense is 3% on the $28B the borrowed. So at around a 65% delinquency rate the student loans business will be breakeven. Lucky for them they have related business that are doing quite well. If they can keep the current loans at around 83.5% it seems like a great investment. Link to comment Share on other sites More sharing options...
DTEJD1997 Posted October 12, 2015 Share Posted October 12, 2015 Very interesting. How do you guys think about the likelihood of students paying back their loans in the future? I was at the athletic center the other day and overheard two young men discussing their future plans. One of them was going back to school to get a graduate degree. He was bemoaning the cost of it... I could not help myself and chimed in that he needed to stay away from student debt. He said he was currently underemployed and working as a waiter. This was not a job that he studied/trained for. He said he simply saw no other way forward and that it was a desperate move on his part. What totally floored me was that he ALREADY had almost $100k in undergraduate debt. He figured that he had access to loans, could get some amount of money to live on while studying, and MIGHT have a chance at a better future. He said that he knows several other friends that are in like circumstances. He just didn't know what else to do... I didn't know what to say at that point other than to wish him well. Education in this country is not going to end well. Link to comment Share on other sites More sharing options...
jawn619 Posted October 12, 2015 Share Posted October 12, 2015 Very interesting. How do you guys think about the likelihood of students paying back their loans in the future? I was at the athletic center the other day and overheard two young men discussing their future plans. One of them was going back to school to get a graduate degree. He was bemoaning the cost of it... I could not help myself and chimed in that he needed to stay away from student debt. He said he was currently underemployed and working as a waiter. This was not a job that he studied/trained for. He said he simply saw no other way forward and that it was a desperate move on his part. What totally floored me was that he ALREADY had almost $100k in undergraduate debt. He figured that he had access to loans, could get some amount of money to live on while studying, and MIGHT have a chance at a better future. He said that he knows several other friends that are in like circumstances. He just didn't know what else to do... I didn't know what to say at that point other than to wish him well. Education in this country is not going to end well. I share a similar view. Unless you go to a top 50 college in the U.S., your degree doesn't mean much. Yet there are many of these private universities that charge just as much as ivy leagues so when a student comes out they'll have 150-200k in loans. Just wanted to hear some other's opinions. Link to comment Share on other sites More sharing options...
Jurgis Posted October 12, 2015 Share Posted October 12, 2015 I share a similar view. Unless you go to a top 50 college in the U.S., your degree doesn't mean much. Yet there are many of these private universities that charge just as much as ivy leagues so when a student comes out they'll have 150-200k in loans. Just wanted to hear some other's opinions. OT. Sure your degree means something. You just have to choose your area of study well. Computer science degree from almost any OK'ish university will give you $70K+ salary on graduation. And, no, studying at home instead won't give the same results for average student. We are not talking about Zuckerbergs and Wozniaks here. Link to comment Share on other sites More sharing options...
DTEJD1997 Posted October 13, 2015 Share Posted October 13, 2015 I share a similar view. Unless you go to a top 50 college in the U.S., your degree doesn't mean much. Yet there are many of these private universities that charge just as much as ivy leagues so when a student comes out they'll have 150-200k in loans. Just wanted to hear some other's opinions. OT. Sure your degree means something. You just have to choose your area of study well. Computer science degree from almost any OK'ish university will give you $70K+ salary on graduation. And, no, studying at home instead won't give the same results for average student. We are not talking about Zuckerbergs and Wozniaks here. Jurgis: Yes, you have to choose your field of study well. Unfortunately, you will get little help from guidance counselors or academic advisors. They will regularly tout the value of a "well rounded education" and the versatility of a "liberal arts degree". Unless you are coming from a VERY top school these are worth almost nothing... Even this though is not really that important...at least for this thread. WHAT IS IMPORTANT is that in the USA, ALL "EDUKATION" is bankrolled the same. It does not matter that you are a "C-" student wishing to study 17th century Chinese tapestry techniques at Ferris State upstairs weekend college....OR you are a "A" student wishing to study nuclear medicine at Harvard. The USA government will bankroll BOTH. The crazy thing is...the cost is rapidly becoming the same. Heck, here in Michigan "Western Michigan Cooley Skool of laws & such" is charging OVER $50k a year! Half their graduates can't pass the bar exam! Harvard Law School is about $57k a year....Cooley is about $47k a year. Depending on who you believe, Harvard is close to the #1 law school in the country....Cooley is about 205 out of 215. Cooley isn't the bottom, but it is pretty darn close. Yet it costs about 83% of the #1 school in the country. Much as I like to pick on Cooley...they aren't the only institution of "higher learning" that is like this. The problem is that there are NO underwriting standards for education. Not for the students. Not for the institutions. Link to comment Share on other sites More sharing options...
ritrading Posted October 13, 2015 Share Posted October 13, 2015 WHAT IS IMPORTANT is that in the USA, ALL "EDUKATION" is bankrolled the same. It does not matter that you are a "C-" student wishing to study 17th century Chinese tapestry techniques at Ferris State upstairs weekend college....OR you are a "A" student wishing to study nuclear medicine at Harvard. The USA government will bankroll BOTH. The problem is that there are NO underwriting standards for education. Not for the students. Not for the institutions. I have no doubt that default rates will worsen in the future. As long as there are no underwriting standards and as long as the government continues to bankroll poor learning choices, there really shouldn't be a way to pay off what are essentially personal hobbies. I'm beginning to think this is a company whose distant future cannot be easily predicted by historical evidence. The death of this company would be when the government chooses not to give out loans or raises student loan interest rates to appropriate levels. Given that Fannie and Freddie still give out loans to buyers at very low rates, I'm inclined to think that NNI will continue to be able to operate, maybe less profitably. I'm inclined to think that NNI will be operating at lower risk than during FFELP times, since they will only be servicing them. They have smaller danger periods where they hold loans in the middle of the securitization process.. I'm really considering taking a small position at the current price. Hoping to see if anyone has seen something in the filings or news which I've missed. Link to comment Share on other sites More sharing options...
Jurgis Posted October 14, 2015 Share Posted October 14, 2015 You guys are saved: http://money.cnn.com/2015/10/09/news/companies/bunny-ranch-brothel-student-loan-matching/index.html?iid=ob_article_footer&iid=obinsite 8) Talk about great management... where do I invest? 8) Link to comment Share on other sites More sharing options...
ritrading Posted October 14, 2015 Share Posted October 14, 2015 You guys are saved: http://money.cnn.com/2015/10/09/news/companies/bunny-ranch-brothel-student-loan-matching/index.html?iid=ob_article_footer&iid=obinsite 8) Talk about great management... where do I invest? 8) 30K per month? I think it's time for a change of career. Link to comment Share on other sites More sharing options...
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