The recent widening between three-month U.S.-dollar Libor and the 90-day financial commercial paper rate is credit negative for FFELP SLABS, said Moody's investors Service recently in its publication called Moody's Student Loan Scholar.
The widening has been an effect of the European financial market's funding stress.
"The widening between Libor and CP narrows the margin between the CP-based rate on FFELP loan and the higher Libor-based coupon paid to bondholders," explained the rating agency.
Analysts said that the relationship between Libor and CP will stay volatile for as long as the European sovereign debt crisis affects the Continent's banks' willingness to lend to one another.
According to Moody's, the spread between Libor and CP has widened by roughly 0.20% in the last three months, which is two times the historical spread.
But, the rating agency pointed out that the widening is much lower and less volatile compared with the 0.50% average spread at the height of the financial crisis from September 2008 to May 2009.
"The current widening between Libor and CP is credit negative for FFELP student loan securitizations, but it is within our expectation," Moody's analysts stated.
They are anticipating that the spread between Libor and CP is going to average 0.10% and to spike at least one time in the life of a securitized deal at a rate of 0.75% for six months. This is higher than the 0.20% seen in the last three months.
Moody's said that this widening is credit negative since FFELP student loans have interest rates that are based on CP. However, the deals issue bonds that have interest rates that are based on Libor, which remains higher versus CP.
This is why, according to analysts, the excess spread generated by the securitized offering is lessened when the spread between Libor and CP widens.