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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Spekulatius who wrote (22265)	10/15/2005 5:06:22 PM
From: gcrispin	Read Replies (2) \| Respond to of 78525

You are correct in pointing out that the residuals from the securitized bonds is big question mark for FMD. However, I think the future cash flow from these bonds can be considered to have a greater than zero value. First, TERI is the guarantor for FMD loans. Since TERI is a not for profit agency, students may not discharge these loans by declaring bankruptcy. The article I linked noted that the company stands to receive $3 in cash for each $1 in discounted income recognized at the time of the securitization (assuming a 12% discount rate). The historical net default rate for these bonds is 3%. FMD has modeled a 6% net default rate for their residuals in June 05 securitization. Finally, securitizations are not all lumped together, but sold in tranches with credit ratings ranging from AAA to A depending on their credit enhancements and payment pecking order. The prepayment risk due to higher interest rates is more difficult to quantify. However, considering the price of the stock, I like the risk/reward ratio with FMD.