The third-ever student loan securitization containing 90-day commercial paper-linked paper saw strong demand last week, signaling that the sector has found a new benchmark; but some in the market think it is too soon to say whether CP can replace three-month T-bills as the sector's secondary index, along with three-month Libor.

Last Wednesday's pricing of $400 million of student loan-backed notes from South Carolina Student Loan Corp. consisted of two equal classes, one indexed to three-month Libor and one indexed to the Federal Reserve's 90-day commercial paper rate. The $200 million piece represents the largest amount of CP-indexed paper sold to date, according to a source at lead manager William R. Hough & Co.

"This offering saw great interest and it seems more buyers are interested in CP-indexed paper," said Charles Ryan, who handled the deal for St. Petersburg, Fla.-based Hough, noting the class was approximately two times oversold. "I believe we will see CP floaters for student-loan deals more and more in the future."

The main reason, according to Ryan, is that since January 2000 the Federal Family Education Loan Program, which guarantees Stafford loans, has indexed loans to the 90-day CP rate.

John Hupalo, managing director at UBS Warburg, who specializes in the student loan sector, is not ready to say that CP has found a home with buyers of student loan-backed paper just yet, noting the market's acceptance is yet to be wide-spread.

"The unique return parameters of the underlying student loan assets have long required issuers to be creative in structuring securities to minimize or eliminate basis risk," Hupalo said. "The T-bill floaters, and now the CP-floaters, attempted to address this issue. The jury is still out on the CP-floaters. Right now, issuers are paying about a 10 or more basis point premium in yield compared to comparable Libor paper.

"If the spread differential stays at these levels, CP-Floaters could go the way of T-bill indexed student loan securities. But if the spread narrows significantly, CP could survive as an index in the sector," Hupalo added.

The index cannot become a benchmark, however, until it is adopted by the sector's largest issuer, Sallie Mae, which "has no plans to issue CP-indexed paper in the near future," according to Guido Van der Ven, managing director of Corp. Finance for Sallie.

"A lot of the loans outstanding are still indexed to T-bills," Van der Ven said. "There are all kinds of ways to deal with the basis risk between T-bills and CP, namely swaps or other derivatives."

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