Until recently, the residual interest in student loan securitizations was a tough sell, but there have been at least two issues of bonds backed by excess cash in these deals, and Fitch Ratings expects to see more.
In a report published today, Fitch said that a number of seasoned student loan securitizations have been, or are approaching the point of, releasing excess cash, making them suitable candidates for residual interest securitization. Fitch Ratings has rated two such transactions, one backed by the residual interests of multiple Federal Family Education Loan Program (FFELP) trust and one backed by 99% of the residual interest of a single private SLABS trust.
Many SLABS transactions allow for excess cash to be released to the holder of the residual interest, or class R certificates, if certain conditions are met. The holder of the residual interest can pledge it to a trust (the repack trust) that issues asset-backed bonds. A repack trust can be collateralized by the residual interest of a single SLABS trust or multiple trusts (the underlying trusts), and is typically structured as a single-tranche pass-through.
For a full turbo structure, the residual interest holder will not receive any cash flows until all the bonds are paid in full. This type of transaction is not considered a suitable candidate for residual interest securitization.
However, many SLABS transactions allow for excess cash to be released to the residual interest holder while bonds are still outstanding, provided certain conditions are met. These conditions are typically set in the form of credit enhancement targets in terms of parity ratio (ratio of trust assets over liabilities) or overcollateralization (OC; trust assets less liabilities).
For transactions with a target parity ratio at 100%, the source for excess cash release will be excess spread. Excess spread is the excess of interest earned from trust assets over program expenses and interest paid on trust liabilities. Excess spread varies from deal to deal and is generally less than 1% for SLABS backed by student loans originated under FFELP and 2%−4% for SLABS backed by private student loans.
For transactions with target parity above 100%, excess cash can also come from principal and interest collections from the OC that are not used to cover credit losses, program expenses or bond interest.