Bank of America Merrill Lynch analysts' view on most senior FFELP and private student loan ABS remains positive, they said in a Sept. 14 report.
The positive stance comes despite the expectation for higher default rates when the Department of Education (DoE) releases two-year Cohort Default Rates on Sept. 17 and three-year Cohort Default Rates on Sept. 24.
Analysts anticipate that both rates will rise on a year-over-year basis. They also expect two-year public and private schools and most for-profit schools underperform four-year public and not-for-profits schools.
This outcome will surely lead to more negative headlines, although these should not result in wider spreads, analysts said.
BofA Merrill analysts explained that the DoE has entered into many servicing contracts for its holdings of Federal students loans. The contracts are spilt between several groups, which are the four Title IV Additional Servicers (TIVAS), several not-for-profits (NFP), and DoE Student Loan Servicing Center (ACS).
The TIVAS cover FedLoan Servicing (American Education Services/Pennsylvania Higher Education Assistance Agency); Great Lakes Education Loan Services; Nelnet; and Sallie Mae Corp.
The remaining players in the FFELP market are still adjusting to the change in the Federal student loan market or to the total replacement of FFELP with the Federal Direct Loan Program or FDLP.
The DoE released the servicing allocation percentages for FDLP loans originated over the next year. Some shifts have happened with Nelnet seeing the biggest increase and Sallie Mae experiencing the largest dip. Analysts said these percents are different from year-to-year and should have no impact on deals serviced by these firms.
Relative Value
The incremental spread/yield of private student loan ABS over CLOs has moved from negative 10 basis points to negative two basis points, with the spread tightening in CLOs outpacing the same for private student loan ABS, BofA Merrill said in the report.
Even though analysts still think that spreads in private student loan ABS will continue to tighten, they do not seem as compelling compared to CLOs as they were several weeks ago, analysts said.
The incremental spread/yield from private student loan ABS versus CMBS A4 notes, however, rose to 63 from 50, analysts said. They think that the gap between private student loan ABS and CMBS A4s can still move to tighter levels.
