ABS Vegas: Student Loan ABS on the Up and Up

Blame the sullen headlines and not deal performance and issuance forecast for the sparse attendance at this year’s student loans ABS panel at Las Vegas ABS.

That's the view of Leo Subler, senior vice president at Sallie Mae, who said the depressing state of headlines surrounding the student loan market may give potential new players the wrong impression about the asset class.

In fact, he added, student loan securitizations (SLABS) have put in some strong performances in the post crisis environment as well as undergoing an underwriting makeover – at least on the private lending side of the equation.

Now that Sallie Mae has completed its separation from Navient, Subler expects issuance on its private student loan side to pick up significantly.

In 2014, the lender issued its first private student loan deal, backed entirely by its SMART option loan product. The lender plans to step up issuance in 2015. Subler said to expect at least one deal in 2Q 2015 and several deals to be issued in the subsequent quarters this year.

Driving Sallie Mae’s securitization program is the company's rapid growth over the last seven years. But this 40% expansion — approximately over $4 billion of new originations on top of an existing portfolio of $8 billion — is “too fast” for regulators, who prefer to see growth capped at a 20% rate.

To trim the balance sheet, the issuer must sell its loan production and those sales, Subler said, are likely to take the form of securitizations and residual sales.

For investors, it means a sizeable calendar of high quality assets. Sallie Mae and the other issuers that have tapped the securitization market in recent years have only included high quality loans that are underwritten to high FICO borrowers and in most cases have a co-signer.

According to DBRS, in 2014 eight issuers placed 11 private student loan transactions totalling $3.3 billion. 

The market saw its fair share of new issuers, like SoFi, which made its debut at the end of 2013. All have included the more rigorous underwriting standards driving loan origination volumes in the market today. Joe Riber, a vice president at DBRS, which rated the SoFi deal, said that other originators in SoFi’s field — such as Commonbond, Discover Student Loans, Citizens Bank and Darian Rowayton Bank — might look into securitization.

Also under discussion were residual value transactions. Sallie Mae completed its first residual value transaction on private student loans concurrently with its private student loan securitization last year. The residual piece in a SLAB is fundamentally the equity tranche, the flows that are left over in a transaction after all payments have been made to investors and other relevant parties. “The number of residual investors has grown...the level of enhancement in these deals and the credit of consumers open the market to even more players,” said Subler.

So why the low attendance at Monday afternoon’s panel? 

Panelist Thomas Glanfield, president and CEO of BPA Boston Portfolio Advisors, blames it on the “same tired bullet points” outlining the panel in the conference agenda. Monday’s discussion was supposed to be centered on student loans as the next debt bubble to burst; instead the tone was refreshingly optimistic. “If you look at these loans you will become interested and you will want to invest,” he said.