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CommonBond's next student loan ABS includes prefunding account

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CommonBond’s next student loan securitization includes a prefunding period that allows it to lock in the current cost of capital to fund future originations.

The $355.45 million CommonBond Student Loan Trust 2018-C-GS will initially be backed by just $291.47 million of refinance loans; 20% of the proceeds, or about $80 million in cash, will be set aside to acquire additional loans used to refinance the debt of borrowers with advanced degrees and high paying jobs, according to rating agency presale reports.

The deal is the first deal by CommonBond to include a prefunding period, according to Moody’s Investors Service; it may also be the first such deal by any refinance student lender.

“Issuers typically include a prefunding period in a securitization to lock in the cost of capital used to acquire loans,” Moody’s states in its presale report. “This is even more relevant in a rising interest rate environment.”

Both Moody’s and DBRS note that prefunding periods introduce the risk that the loans acquired after deal closing may have different characteristics than the existing loans in the pool. However, both note that this risk is mitigated by restrictions on the credit characteristics of loans that can be acquired. Moody’s also notes that this risk is limited by the relatively short duration of the prefunding period, just three months.

Another potential concern is the fact that the cash on deposit in the prefunding account will earn interest at a rate considerably lower than the interest paid on the bonds to be issued in the securitization, resulting in negative carry. Again, this risk is mitigated by the relative short span of the prefunding period, as well as the availability of excess cash earned on student loans acquired at the close of the deal.

Three classes of notes will be issued in the transaction; Moody’s and DBRS both expect to assign triple-A ratings to two tranches of Class A notes, one fixed-rate and one floating-rate, totaling just over $300 million. There is also a $42.5 million tranche of Class B notes rated AA by DBRS alone and a $20.8 million tranche of class C notes rated A by DBRS alone.

At closing, the balance of the collateral (including the cash) will exceed the balance of the notes by 3.62%; that’s down slightly from CommonBond’s prior transaction, which had overcollateralization of 3.85%.

However, the Class A notes will benefit from higher subordination, consisting of the balance of the Class B and Class C notes, than the comparable tranche of the prior deal: 17.29% vs. 15.33%.

At closing, a majority-owned affiliate of Goldman Sachs Asset Backed Securities Corp., will be the retained interest holder and will receive 5% of all amounts collected on the securitized student loans as long it continues to be the retained interest holder, thereby retaining 5% of the credit risk.

The initial purchasers are Goldman Sachs, Barclays Capital, Citigroup Global Markets and Guggenheim Securities.

The credit characteristics of the borrowers in the initial pool of collateral are broadly similar to those of recent transactions completed by CommonBond. However, the average balance of $90,930 is higher than the prior four deals; the two deals completed earlier in 2018 had average balances of $79,205 and $76,752.

The weighted average borrower income of the latest deal is also higher, at $191,632, compared with $174,245, $148,721, $159,159 and $167,951 for the four prior deals.

And despite the fact that prevailing interest rates are rising, the weighted average coupon of the latest deal is lower at 5.18%, compared with 5.28%, 5.55%, 5.51% and 5.51%.

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