First Marblehead Crushed Again

Bank of America doesn't renew one of its contracts with the loan servicing firm.
Author:
Publish date:

Updated from 10:02 a.m. EDT

First Marblehead

(FMD)

, whose chief executive resigned two months ago in a gift-giving scandal, said

Bank of America

(BAC) - Get Report

has opted out of an automatic renewal provision in one of its many contracts with the firm. The contract had been slated to automatically renew for another year next May.

In September, Daniel Meyers resigned as First Marblehead's CEO after it was discovered that he had exchanged $32,000 in gifts with Kathy Cannon, who at the time was a senior vice president in BofA's student loan operation. A few weeks before Meyers' resignation, BofA officials asked Cannon to leave the bank for violating its policies on avoiding conflicts of interest.

Shares of First Marblehead were getting shellacked by the news, falling $7.64, or 24%, to $24.75.

The decision by BofA not to automatically renew the student loan contract may signal that the nation's second-largest bank is either trying to renegotiate the terms of the agreement, or buying itself time to find an alternative serving firm.

Goldman Sachs analyst Michael Hodes was quick to see the announcement as a big negative for First Marblehead, saying "the visibility on FMD's outlook is poor.''

"We view the BAC news as a huge negative and see it as underscoring how little warning FMD management can have with its key relationships,'' said Hodes, in a research note. Goldman Sachs has done investment banking work for First Marblehead in the recent past.

A Bofa spokesman confirmed a letter notifying First Marblehead of its intention had been sent earlier this week. He declined to comment further.

In the press release, First Marblehead tried to put the best face possible on the BofA news, saying the bank "will continue active negotiations'' toward renewing the deal.

First Marblehead's newly installed CEO, Jack L. Kopnisky, says, "We understand that this precautionary decision allows the bank the utmost flexibility in arriving at an appropriate new agreement.''

Any decision by BofA to pull business from First Marblehead would be painful for the servicing firm, which lists the Charlotte, N.C.-based bank as its second-biggest customer. First Marblehead, in its most recent fiscal year, serviced $2.7 billion in educational loans, of which $632 million was underwritten by BofA.

The contract BofA is having second thoughts about involves "direct-to-consumer private student loan origination and securitization services.'' It's not known what the dollar value of that contract is.

This is the second time since the gift-giving scandal emerged that Bank of America has taken steps to alter its business relationship with First Marblehead. Days after the scandal broke, BofA backed out as co-manager on an upcoming $1.68 billion educational loan securitization deal that First Marblehead completed last month.

In recent weeks, First Marblehead's stock had recovered all of its losses in the wake of the scandal, and then some. On Wednesday the stock closed at $32.39. In early October it traded as low as $21.