Nelnet Buys Interest in FFELP Loans

Nelnet Inc. (NNI - Analyst Report) has acquired theresidual interest in $1.9 billion of Federal Family Education Loan Program (FFELP) consolidation loans from an affiliate of Greystone & Co. Inc. The deal terms were not disclosed. This acquisition is projected to be immediately accretive to the company’s base net income.

Nelnet obtained the ownership interest in GCO SLIMS Trust-1 (SLIMS Trust), which bestowed the company rights to the residual interest in GCO Education Loan Funding Trust-I (Trust-I). Per the deal, Nelnet will become the master servicer and administrator for Trust-I and administrator for the SLIMS Trust.

The acquisition is anticipated to augment Nelnet’s student loan portfolio to more than $25 billion. As of March 31, 2011, the company had $23.5 billion in net student loan assets.

Nelnet’s first quarter 2011 earnings of $1.09, excluding items, surpassed the Zacks Consensus Estimate of $1.06 per share based on its benefits of revenue diversification through fee-based businesses, a drop in operating expenses and loan loss provisions. Concurrent to the earnings release, the company announced a 3-cent hike in its quarterly dividend to 10 cents.

Although the student loan reform law forbids companies like Nelnet and SLM Corp. (SLM - Analyst Report), better known as Sallie Mae, from originating federal student loans since July 2010, Nelnet’s strategy of business diversification augur well.

Increasing revenues from its fee-based business and servicing of loans for the Education department should support its earnings. Its capital position is solid. However, concerns over implementation of the recent financial reform act and a protracted economic recovery remain. Expenses are also expected to increase with a rise in the volume of loan servicing. Yet, the dividend increase gives a boost to investors’ confidence.

Nelnet shares currently have a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.

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