Monday, April 16, 2007

Calls of Note Part 4

- Thomas Weisel Partners commented on First Marblehead (NYSE:FMD) over the weekend in light of Sallie Mae (NYSE:SLM) acquisition.

Acquisition discussion highlights First Marblehead density disk: As FMD's largest customer (JPM, 25% of total service revenue) is reportedly involved in proposals for SLM, the potential for volume losses appears significantly increased. Firm notes that FMD's three primary volume contributors (JP Morgan, Bank of America and Charter One) account for 52% of total service revenue.

Loss of JP Morgan may result in 26% reduction of loan volume and 27% of earnings (based on 2006 earnings): While the company has increased the number of other lending partners, they note that (since JP Morgan purchased CFSI and pulled out from its SLM partnership) FMD's dependence on JP Morgan has increased.

TWP believes that the potential SLM transaction highlights the rising concern that both JP Morgan (note November 2005 CFSI acquisition and potential near term loan securitization) and Bank of America (renegotiation of contract in Summer 2007) may begin to originate and retain private loan volumes in order to provide additional services (bank accounts, credit cards) that the highly educated and leveraged customer base. Thinks FMD shares are fairly valued at current levels.

Notablecalls: What TWP did not know over the weekend and what we know now, is that both JPM and BAC are included in the group that is offering to buy SLM. Expect to see downside in FMD.

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