I miss judged FMD's short term business model.

Anybody following FMD know that FMD is done to $18 now. I was quite bullish on FMD thinking its student loan business is a different beast than home loan, thinking student loan industry is a growing one because of growing tuition and government cutting federal financial aid for students. The fact that FMD's last quarter's securization was the biggest in its history in a challenging credit market fortified my belief that FMD is insensitive to the current credit crisis. I now think i am wrong short term on FMD's business model. FMD depends on fixed income investor to buy bond from FMD, when bond investors are losing big money on AAA rated bond, their risk averse nature make them even more conservative, and this leads to FMD's decision not to securize (not to sell bonds) for this quarter. This is a serious risk for FMD's business model since no securization means no revenue. Although FMD only started to do 4 securizations per year from last year, a reverse back to 3 securizations a year in itself is not that serious, but we do not know when bond market will become active again, also we do not know how profitable will it be for FMD's business once bond market recovers. Also Moody is reviewing FMD's 18 trusts (going from memory here), if Moody downgrade FMD's bond grade, it will be even harder for FMD to sell bonds. FMD may be waiting for Moody's decision before it attempts another securization. It is impossible for us to be certain what outcome Moody's review will turn out to be. It is nothing concrete, result of review is not necessarily a reflection of actual bond performance, it is just some body's opinion how those bonds will perform in the future. So it is rather unpredictable.

In all, FMD's short term future is very unclear, long term, its business environment is still attractive. There is a real need for their business, students need loans, and fixed income investor needs higher yield investment tools than 3% treasury bonds. Finally student loans can not be written off even if you declare bankruptcy. I still like FMD's business a lot, but short term I will reduce my position given opportunities as I believe that home loan crisis still have some time to go and we may have better opp in the near future to buy FMD, just like the end of last week when FMD announces its decision not to securize for this quarter. I bought heavily the day they announced the news at 16.51. Compared to FMD's risk reward ratio, a price under 20 is pretty cheap. But I am still planning to lighten up my positions. I am too over weighted/concentrated on FMD than I need to be.

所有跟帖： 

• Far more detailed discussion can be read here: -longtermInvestor- ♂ (337 bytes) () 12/10/2007 postreply 22:40:32

• 回复：I miss judged FMD's short term business model. -svll- ♂ (405 bytes) () 12/11/2007 postreply 01:16:05

• there is no danger for bankruptcy for FMD, -longterminvestor- ♂ (508 bytes) () 12/13/2007 postreply 15:44:24

• You are not alone in misjudging the risks -凌空长老- ♂ (611 bytes) () 12/11/2007 postreply 09:32:19