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Kentucky's next offering student loan bonds backed primarily by refis

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The Kentucky Higher Education Student Loan Corp. has made some changes to its funding program.

Its next offering of student loan revenue bonds will be backed entirely by private student loans, most of them loans refinancing the debt of borrowers who have completed school and are gainfully employed.

By comparison, the previous offering, completed last year, was backed by a mix of private and federally guaranteed student loans.

(Like many state student loan authorities, KHESLC originally made loans under the Federal Family Education Loan Program, but switched to making private loans after FFELP ended in 2010.)

The Series 2018-1 will consist of two tranches of fixed-rate notes: a $69 million tranche with preliminary AA ratings from S&P Global Ratings that benefit from credit support of 21.5% to 22.4% and a $16 million tranche rated BBB that benefits from 13.3% to 13.8% credit support.

KHESLC will use 2% ($1.7 million) of the initial trust deposits to fund the debt service reserve fund.

The notes will be issued under a new master trust indenture dated July 1, 2018. The structure is also a departure from the previous transaction, which consisted of a single tranche of notes rated AA by S&P. The structure is also a departure from the 2017 offering, which consisted of a single tranche of A-rated notes.

The maturities of the notes to be issued in the new deal have yet to be determined.

Bank of America Merrill Lynch is the underwriter. The collateral will be a mix of in-school, parent and refinance loans, some $42.1 million of which have already been originated; the remainder must be originated by Aug. 1, 2019.

S&P expects defaults to range from 8% to 9% of the collateral over the life of the deal; it expects cumulative losses in the range of 4.55 to 5.5%.

Among the strengths of the transaction, according to S&P, is the credit quality of the pool of loans already originated or to be originated, which must meet the following criteria: none may fund “proprietary” (career training) school attendance; at least 93% must be refinance loans; no more than 5% can be in-school loans with a deferred repayment option; no more than 1% can be in-school loans with a deferred payment option and no co-signer; and no more than 9% can have FICOs of less than 700.

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