First Marblehead sinks as big client goes bankrupt

NEW YORK (Reuters) - Shares of First Marblehead Corp (FMD.N), one of the largest securitizers of student loans, plummeted on Tuesday after a major client filed for bankruptcy protection.

First Marblehead shares fell $3.20, or 41.6 percent, to $4.50 in premarket trading.

The decline came after The Education Resources Institute Inc, which calls itself the largest not-for-profit guarantor of U.S. private education loans, filed Monday for Chapter 11 bankruptcy protection. It said rising borrower defaults and credit market problems damaged liquidity, and that its viability would be threatened absent a bankruptcy filing.

According to First Marblehead's quarterly report, processing fees from TERI, as the company is known, represented about 32 percent of total revenue in the six months that ended December 31.

TERI is the exclusive outside provider of default guarantees for private student loans of First Marblehead clients. It also guarantees loans held by the National Collegiate Student Loan Trusts, which First Marblehead uses in its securitization program. The Boston-based companies have worked together since 2001.

"First Marblehead is analyzing the implications of this filing on its lenders, investors, borrowers, as well as the NCSLT," Chief Executive Jack Kopnisky said in a statement.

"The company is working diligently on securing an alternative guarantor as well as structural solutions for loan default guarantees for future originations," he continued. "In addition, we have adjusted our collection and underwriting strategies to adapt to the challenges presented by the turmoil in the capital markets and the current consumer credit cycle."

Loan securitizers package loans into securities that can be sold to investors. Willis Hulings, TERI's chief executive, on Monday said investor demand has "evaporated" for bonds backed by student loans because of turmoil in credit markets.

(Reporting by Jonathan Stempel; Additional reporting by John Tilak in Bangalore; Editing by Maureen Bavdek)