Friday, September 15, 2006

Calls of Note Part 7

Several firms have positive comments on First Marblehead (NYSE:FMD) today after the co announced the estimated upfront advisory fee of $175M, or 12.6%, for its September securitization, owing to the retention of less residual.

* JP Morgan notes they view this as a positive for FMD because upfront fees are higher quality earnings than a residual. Firm's estimates likely need to be revised higher, but they are waiting for more details on the securitization terms due to the change in earnings composition.

* Friedman, Billings, Ramsey's notorious bears are upgrading their rating to Mkt Perform from Underperform. With First Marblehead's upcoming securitization significantly larger than expected and more importantly, the company now being able to monetize a portion of its noncash residuals into cash, they believe this helps address much of the near-term risk to the story. Although, firm's concerns regarding customer concentration, pricing pressure, and the impact of higher borrowing levels from the competing federal loan program all remain, they believe the fact the company is able to establish a secondary market for its residuals is meaningful.

* UBS notes that although the size of the pool securitized at $1.39B was well ahead oftheir
$800M estimate, it is difficult to assess loan volume growth because this is the first time FMD has completed a deal in its fiscal 1Q. Therefore, it is possible that loans they had earmarked for the 2Q securitization were securitized earlier in 1Q.

While they view higher upfront cash as a positive, particularly given their concerns with FMD's ability to grow cash flow near-term, the firm awaits the residual economics (which are likely to be lower than previous deals) to better assess the margins in this transaction. Nonetheless, an apples-to-apples comparison of margins with prior deals may still be difficult given all of the moving parts.

Maintains Reduce and $42 tgt.

Notablecalls: This certainly is a positive surprise for FMD shareholders. On the other hand, as much as I don't like saying it, UBS does have a point. We don't know what or how much FMD gave away in terms of residual income. Depending on how high the shares will gap, I suspect they will be chopped down later on. Heck! Capitulation of FBR must count for something!

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