Arizona Education Loan Marketing Corp. (AELMaC) will be in the market in the coming weeks with a series of rare deals backed by a heavy concentration of consolidation loans, for its first term ABS offerings since 2001. St. Petersburg Fla.-based underwriter William R. Hough is running the book for the deals, the first of which is expected to price by the middle of this week.
Announced mid last week, $125 million of a single-tranche three-month Libor-indexed floater, with a five-year average life, will be the first of up to nine offerings scheduled to hit the term markets through October. AELMaC is tapping the term markets to diversify its funding base, sources added, as most of the company's funding comes from the auction rate market.
The collateral consists entirely of Federal Family Education Loan Program (FFELP) student loans, which in turn is 98% re-insured by U.S. Department of Education. Of the total $970.7 million principal balance of the portfolio, 84.27%, or $818 million, are in the form of consolidation loans. 70.86% of the portfolio is in repayment.
The high concentration of consolidation loans strengthens the deal from a prepayment perspective, according to Fitch Ratings analyst Andrea Murad, who noted that once a student loan is refinanced, it can't be consolidated again.
But while the longer duration of the fixed-rate loans present a basis mismatch with the Libor indexed bonds in the short term, the trust will realize floor income, as loans consolidated prior to the upcoming July 1 rate reset will benefit from additional spread. This will continue until T-Bill and commercial paper rates start rising, which is expected later in the year. Also, the 2002-C1 series is subject to mandatory redemption should the Treasury-to Eurodollar (TED) spread exceed 300 basis points for two consecutive quarters.
The collateral is geographically diverse, with the loan guarantors representing over 13 states. Roughly 71% of the loans are guaranteed by the tandem of United Student Aid Funds Inc. (36.9%), which guarantees loans from up to nine different states and California Student Aid Commission (34%). Also, Virginia-based Education Credit Management Corp. (7.4%) and Florida Dept. of Education (5.5%) guarantee lesser amounts of the collateral.
AELMaC was created in 1982 under Arizona state nonprofit corporation laws with the purpose of providing both a warehousing facility and a secondary market for Arizona-originated loans. In 1992, AELMaC formed Southwest Student Services Corp. to service the loans it acquired. Southwest is servicing the overwhelming majority of the loans, with Sallie Mae servicing roughly 1.2% and AFSA Data Corp. servicing .15% of the loans.
