Private student loan ABS issuers, looking to increase their advance rates in securitization deals by either “reducing the residual piece or carving out lower rated tranches” will find that the proposed 5% risk retention rule has created an overcollateralization floor “in terms of how far issuers can go down the spectrum,”according to a Fitch Ratings report.
Most triple-A rated deals start with 20% to 30% overcollateralization; single-A rated deals begin with 5%-15% hard overcollateralization retained by the issuer as equity. Most private student loan transactions issued since the financial crisis began were typically structured with more than 5% credit enhancement levels at closing.
For now, the transactions that Fitch rates look safe but the issue could come into play when issuers look to structure transactions with higher advance rates, “meaning with only a 2 to 3% residual piece,” explained Fitch.
“They won’t be allowed to do so because by the rule says they must retain 5%,” explained a Fitch analyst.