Earnest Gains Ratings Bump to 3rd Student Loan ABS

Online lender Earnest completed its third student-loan securitization in six months, in another oversubscribed offering that raised the finance company’s total issuance to $527 million for 2016.

Earnest Student Loan Finance 2016-C included $190 million of notes, with bond rating agency DBRS assigning an ‘AA (low)’ rating on the senior notes – an elevated rating from the company’s prior transaction in May.

"We continue to see traction in the markets and an appetite for bonds backed by high quality assets. Issuing three deals in six months showcases our strong relationship with the capital markets," said Louis Beryl, CEO and co-founder of Earnest, in a release issued Tuesday by the San Francisco firm.

The company received double-A structured finance ratings from DBRS for a $56.83 million Class A-1 tranche secured by variable-rate loans, and a $119.03 million Class A-2 tranche backed by fixed-rate loans.

It also received a ‘BBB’ for a subordinate slice of $13.65 million in Class B notes that are supported by both variable and fixed-rate loans.

The notes include higher levels of overcollaterization compared to its previous offerings this year. The Class A-1 notes’ initial OC is 12.59% and 12.58% for the A-2 notes. Credit enhancement also includes excess spread and individual reserve accounts for each of the A-1 and A-2 notes at 0.25%.

All the notes priced on July 26, with the A-1 notes set at a spread of 185 basis points over one-month Libor.

The aggregate principal of the loans in the pool is $200.7 million, with $135.8 million in fixed-rate loans. The average balance is $71,670 – the highest of Earnest’s three securitizations this year – with a weighted average credit score of borrowers at 778 that is also a slight bump from previous pools. More than 85% of the borrowers have credit scores above 740.

The borrowers in the pool (average age of 32) have an average income of $134,734 and monthly borrower free-cash flow availability (after expenses) of $4,080.

Goldman Sachs was the structuring agent, and Barclays was lead on the syndication distribution.

Earnest’s previous transaction, EARN 2016-B, was also oversubscribed with its three-class, $188.5 million portfolio of student loans. That issue earned a single-A rating on the senior A-1 floating and fixed-rate notes from DBRS.

Earnest competes with lenders like SoFi Lending (Social Finance), Darien Rowaton Bank and Commonbond in offering loans to refinance student loan debt of students within six months of graduation or who have already entered high-earning professions with advanced degrees in medicine, law or business.  

The company has limited operational history and experience, having funded about $775 million in  student loans to 10,700 borrowers since 2014.