Wells Fargo analysts recommended FFELP and private student loan-backed ABS as nonbenchmark asset classes that provide investors with good relative value opportunities.
Meanwhile, Barclays Capital analysts are maintaining their neutral weighting on senior and subordinate FFELP SLABS. Even though there is a high chance of negative ratings activity from S&P on FFELP deals in the next several weeks, these will likely offer buyers with more attractive entry points into this sector.
A potential credit rating change by S&P does not reflect a significant change in the creditworthiness of FFELP SLABS, Wells Fargo analysts pointed out.
They also believe that the Department of Education will be given the wherewithal to meet its obligations.
The consumer ABS market, they said, has developed a much less benign view of bonds backed by a guarantor, which isnot surprising considering the events of the past four years. Even with all these, analysts said FFELP-backed student loan deals have not benefited from any spread tightening since late 2009.
Meanwhile, analysts noted that the private student loan ABS sector also offers good relative value. This is particularly true for the current pay and next pay classes of senior bonds.
More seasoned deals, including those from the 2002–2005 vintages, might include bonds with somewhat higher coupons that may provide more current income, in addition to wider discount margins, Wells Fargo analysts said.
Market Activity
As a result of the Aug. 5 U.S. downgrade and concerns over the European debt crisis, the FFELP student loan paper was taken down by dealers that pushed secondary spreads roughly two to five basis points wider across the curve, according to Barclays Capital analysts.
After S&P lowered the U.S. sovereign long-term credit rating to 'AA+' from 'AAA', the rating agency kept on CreditWatch negative 744 structured finance deals — 387 of which are FFELP SLABS — previously on CreditWatch negative as a result of sovereign credit risk exposure.
S&P intends to review each deal and take ratings action as it sees fit, expecting to lower ratings on FFELP-backed student loan ABS to equal that of the sovereign rating, 'AA+.'
