The pricing of Nelnet Inc.'s $2.4 billion transaction went exceptionally well last week, say market players. This is understandable. Secured wholly by FFELP loans and carrying triple-A to single-A ratings from the three major credit rating agencies, the deal had a lot in its favor.
Of course, it also helps that Nelnet's largest competitor, Sallie Mae Corp. - which has historically dominated student loan ABS issuance - has no immediate plans to come to the ABS market with a deal of its own. As part of a leveraged buyout offer that Sallie Mae received last month, the student loan provider decided to sit out securitization market activity, and will probably stay on the sidelines for some time, thanks to a fairly robust warehouse facility. Sallie Mae's decision to stay on the sidelines has served to increase investor appetite for FFELP-secured student loan ABS, especially because those bonds perceived by investors to have a government guarantee. Further increasing demand for high-quality investments is the fact that issuance from the mortgage market has slowed significantly.
This slowdown is setting up a tug of war between SLABS investors and dealers, and it will be interesting to see who comes out ahead.
Investors have been testing the market for deals secured by FFELP and private-loan backed transactions lately. They are finding that quality costs, especially on longer-dated maturities. Recent spreads talk on paper secured by FFELP loans have hovered around Libor plus 12 basis points for 14- and 15-year maturities. For some investors, the current yield is not worth holding on to the paper for that long.
Pricing on the 14.3-year tranche of the Nelnet Student Loan Trust 2007-1, managed by Credit Suisse, actually came in at 11 basis points over the three-month Libor. In late 2006, a Nelnet FFELP-secured deal priced a similar security a couple of points wider. Knowing that they have a limited supply of government-guaranteed paper, the dealer community seems disinclined to give anything away. Still, some investors are resolute.
"If spreads are where they were in January, then I'll walk by," one investor said. "Some of these spreads are simply too tight on the FFELP side."
The same thinking appears to apply to secondary trading of Sallie Mae paper, industry participants say. It is a foregone conclusion among many in the securitization industry that once the acquisition is completed and Sallie Mae resumes issuing ABS, then JPMorgan Securities and Banc of America Securities will monopolize all of the main underwriting business, which would eliminate competition for lead manager mandates.
"If we cannot bring a deal for them as dealer, then why trade their paper?" an industry participant said. "You normally see Sallie Mae trading all the time, but their volume is not where it used to be."
Many investors appear willing to ante up for whatever tidy-looking deal comes down the line. Also, with its fairly stable performance history, FFELP-secured ABS paper has earned a reputation as a relatively safe bet. That will make things harder for the value hunters.
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