First Marblehead sinks, guarantor is bankrupt

The decline came after The Education Resources Institute Inc, which is known as TERI and calls itself the largest not-for-profit guarantor of U.S. private education loans, filed on Monday for Chapter 11 bankruptcy protection.

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

"The underlying value of its assets are in question now," said Michael Taiano, an analyst at Sandler O'Neill & Partners LP, who has a "sell" rating on First Marblehead. "If it can't get reimbursed for defaults from TERI, presumably it's on the hook to cover losses."

First Marblehead shares closed down $2.84 at $4.86 on the New York Stock Exchange. They have fallen 89 percent in the last year.

Turmoil in credit markets has reduced investor demand for student loans, prompting lenders such as CIT Group Inc (CIT.N) to quit offering them.

Loan securitizers package loans into securities that can be sold to investors. Other large securitizers include SLM Corp SLM.N, known as Sallie Mae, and Citigroup Inc (C.N).

TERI said rising defaults, credit market problems and a March 26 rating downgrade by Moody's Investors Service damaged its liquidity. In a court filing, Chief Executive Willis Hulings said TERI's viability would be threatened if it didn't seek protection from creditors.

The company is the exclusive outside provider of 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 securitizations. The Boston-based companies have worked together since 2001.

First Marblehead "is working diligently on securing an alternative guarantor as well as structural solutions for loan default guarantees for future originations," Chief Executive Jack Kopnisky said in a statement. He was not available for further comment.

William Galvin, Massachusetts' top securities regulator, on Tuesday called for passage of a federal bill to allow the Department of Education to buy student loans from lenders that need new capital.

"Student loan lenders, like many mortgage lenders, got caught up in the rampant -- and in many respects, unregulated -- securitization of student loans and sold them into markets which at first grew at a frenzied pace but have now frozen," Galvin said in a statement.

Unlike federally guaranteed loans, "private student loans are a complex asset class with long durations and uncertain credit risk," Sandler O'Neill's Taiano said. "That's something that's not in great demand now by asset-backed investors."

(Additional reporting by Svea Herbst-Bayliss in New York and John Tilak in Bangalore; Editing by Maureen Bavdek, Dave Zimmerman, Richard Chang)