Student loan ABS remains the choice U.S. investment for the European buyside, as expressed by a group of portfolio managers at a panel on relative value in U.S. dollar securitization.
For one, student loan collateral is more conducive to the traditional European bid for long-dated, fixed-rate assets. Also, at a 20% conversion, student loan ABS draws less risk-weighted capital for banks than other ABS. Most of the panelists were not fans of credit card and auto ABS in the dollar market, which don't offer the reduced capital benefit and price too tightly; though clearly there have been a few U.S. transactions structured with European buysiders in mind, particularly on the credit card side.
Stefaan De Doncker, portfolio manager at Fortis Bank, likes the student loan market because there are newer issuers offering a spread pickup. "There have been new issuers in student loans, and that is just the opposite of what is happening in the credit card market," Doncker said. "We particularly like the alternative student loans. New deals have greater credit enhancement and offer more spread."
"In my opinion, the economy in the U.S. is not up to speed yet," said Milan Patel, investment manager at HBOS Treasury Services. Patel is weary of anything but prime collateral from top-tier issuers.
Lucky for investors, U.S. student loan volume may not decline as significantly as some have predicted, given that the consolidation loan deals will be less a part of the market as interest rates rise.
Said Guido van der Ven, managing director at Sallie Mae - which has been at the forefront of structuring deals to the European bid - student loan growth should continue at 12% annually over the next several years for a few reasons. First, baby boomers' children are just nearing the college-entry age. Also, the cost of education is increasing, so loans will grow in size as well.
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