CommonBond earned its first triple-A ratings on its next student loan securitization, promising to further reduce the fintech lender’s funding costs.
Both Moody’s Investors Service and DBRS expect to assign their top credit rating to the two senior tranche of notes – one fixed-rate, the other floating-rate – to be issued in the $233.75 million transaction, CBSLT 2018-A-GS. Previously, the two rating agencies had capped their ratings at double-A, primarily due to CommonBond’s short operating history – it has only been making loans to borrowers with advanced degrees and high-paying jobs since 2013.
Standard & Poor’s, which rated CommonBond’s previous deal, completed in October, has yet to issue a presale report on CBSLT 2018-A.
The triple-A ratings put CommonBond on par with Social Finance, which has been operating slightly longer and has more student loan bonds outstanding.
Some of CommonBond's outstanding student loan bonds could also benefit from a ratings lift. On Feb. 9, Moody's placed six tranches issued on 2016 and 2017 vintage deals currently rated Aa2 under review for a possible upgrade, citing its "lower expectation of operational risk" of CommonBond.
The credit quality of the latest transaction is similar to that of CommonBond's previous deal. The only substantial difference that Moody's highlighted in its presale report is the fact that it has more variable-rate loans (23.6%) and less fixed-rate loans (76.4%) than the previous deal, which had 19.9% variable-rate loans and 80.1% fixed-rate loans.
All loans in the CBSLT 2018-A-GS collateral pool are to borrowers who have at least $1,500 of FCF; about two thirds have free cashflow exceeding $3,500. The pool has a weighted-average remaining term of 155 months, similar to the weighted-average remaining term of CBSLT 2017-B-GS. (But less than that of typical traditional private student loans, which have terms of 180 months or longer.)
The weighted-average credit score, at origination, for borrowers of CBSLT 2018-A-GS is 765, compared with 763 for CBSLT 2017-B-GS.
Moody's continues to cite CommonBond's short operating hstory as a significant risk factor, noting that its loans have not experienced an economic cycle. However, as of Jan. 31, student loans originated by the company had a default rate of just 0.03%. The rating agency expects net losses over the life of the CBSLT 2018-A-GS transaction to be 2%. The presale report notes that this is higher than the net loss expectation for high-FICO auto loan transactions (think Mercedes-Benz, BMW and Fifth Third) of about 0.50%, primarily as a result of CommonBond pool’s longer WAL and lower recoveries.
In addition to the two senior tranches, CBSLT 2018-A-GS will issue two subordinate tranches of notes rated by DBRS alone; the Class B tranche is rated AA and the Class C tranche is rated A.
At closing, CBSLT 2018-A-GS will benefit from 3.15% (as a percentage of the initial pool balance) of overcollateralization. The Class A notes also benefit from 12.53% (as a percentage of the initial aggregate pool balance) of subordination from the Class B notes and Class C notes. In addition, Moody's expects that the transaction will benefit from lifetime gross excess spread of about 5.5%.