At long last, after a seven-month absence from the securitization market, the Nelnet Student Loan Trust (NSLT) came to market in early March. The $1 billion transaction, managed by Barclays Capital, Deutsche Bank Securities and JPMorgan Securities, bore out some of the substantial changes underway in the business of financing student loans in the capital markets.

Aside from being completed after one of the issuer's longest waiting periods between transactions, the deal eliminated consolidation loans from the pool securing the notes. The issuer also decided to offer only Libor floating-rate notes, whereas the NSLT 2007-2 issued Libor and auction-rate notes, according to Fitch Ratings, which rated the deal.

The lag between Nelnet's deals reinforced the difficulty of completing SLABS transactions. The Nelnet deal was only the fifth student-loan ABS transaction to hit the market since the beginning of the year. By March 11, 2008, some $6 billion in SLABS had priced, compared with $13.6 billion one year before.

Transactions that do get completed are greeted with demands for very wide spreads relative to where they priced just a year ago. The SLM Student Loan Trust, managed by Barclays Capital and Citigroup Global Markets, among others, priced its 2008-1 series of notes at the three-month Libor plus 25 basis points for the one-year notes. That deal was completed on Jan. 10. One year ago, Sallie Mae priced its 2007-1 series of notes at three basis points below the three-month Libor.

That pricing difference underscores the paltry demand that the student-loan ABS sector has had to contend with recently, despite the fact that many of the bonds are secured by FFELP loans that carry a government guaranty. These are hardly gewgaw assets.

"The whole treatment of student loans in the meltdown is inappropriate," one market source said. "Government-insured loans are very strong. Private loans, properly underwritten, are strong collateral."

The elimination of consolidation loans from Nelnet's pool is another consequence of the withdrawal of liquidity from this sector, even on the origination level, say industry sources.

"When looking at federally guaranteed programs, consolidation loans have the least amount of yield," said Gary Santos, a managing director in Fitch Ratings' ABS group. Further, while lenders do get subsidies for providing consolidation loans, they have to pay back a certain amount.

"It is not surprising that all or some lenders are rethinking that side of the business. They are not being so proactive about originating them," Santos said.

Legislation's Negative Impact

The reason: specialty student loan providers find themselves dealing with provisions in the College Cost and Reduction and Access Act.

Legislation enacted in September 2007 reduced special allowance payments for Stafford and consolidation loans by 55 basis points, 85 basis points for PLUS loans and 70 basis points for eligible not-for-profit lenders. It also put in place new insurance levels for the exceptional performer program and, in some cases, increased lender origination fees.

Lenders have been pulling back on a range of loan programs, not just consolidation loans, according to the National Association of Student Financial Aid Administrators (NASFAA), a trade association. At least 28 lenders have suspended or are exiting FFELP loan production; five say they will limit FFELP consolidation loans, and seven said they would exit or suspend the business of providing private student loans. Sixteen lenders said they would lay off staff, according to the NASFAA.

Only seven lenders, including Citibank, JPMorgan Chase and National City, said they are expanding student lending programs. Officials at MRU Holdings said that it would continue to offer federally subsidized student loans.

"It's important for MRU to be a one-stop-shop for all students, and so for that reason we continue to offer the federal products for all our borrowers," said Jonathan Coblentz, treasurer and head of capital markets for MRU Holdings. Issuers are finding that FFELP loans are not the only type of collateral dealing with the consequences of practically no participation from cautious buysiders. First Marblehead Corp., which provides liquidity to private student loan providers, did not complete an anticipated securitization for its second quarter and said it expected its securitization volumes to materially decrease in fiscal year 2008.

"Our business has been and continues to be adversely impacted by the current market dynamics, including an inability to access the securitization market and more onerous borrowing costs," First Marblehead said in a Securities and Exchange Commission filing after its second fiscal quarter, which ended December 31, 2007.

Fitch Ratings downgraded nine classes of the National Collegiate Student Loan Trust, from the 2005, 2006 and 2007 vintages.

Despite the realities of an unattractive securitization market, the company said that loans available for securitization increased to $982 million. Although the amount of loans available for securitization in the first quarter was higher, at $2.2 billion, the second-quarter amount represented an increase of 43% from the same period last year.

Still, the volatile securitization environment has not scared off all potential issuers of private SLABS. MRU Holdings, which completed its first securitization last year in a $200 million deal, says it still has faith in its product and the securitization market.

"Our unique approach to underwriting is paying off," Coblentz said. In its latest 10-Q filing, 30-day delinquencies among loans eligible for repayment averaged 4.8%. Loans in forbearance that were also eligible for repayment have averaged around 2.7%.

When it completed the deal in June 2007, MRU Holdings said it hoped to do one or two securitizations in the first half of 2008. Despite market conditions, Coblentz said, securitization is still a feasible option for the company, and it expects to complete an ABS deal according to that timetable. The company also said the scale of its previous deal, $200 million, makes a future deal more feasible and manageable.

"It's a heck of a lot less bond that you have to place," Coblentz said. "And we've got a good story. We're not explaining why delinquencies have gone up."

Alternative Funding Sources

Securitization still accounts for a significant portion of financing for many student loan providers. To that end, some issuers are in discussions with non-traditional investors, such as hedge funds, to possibly put together private transactions, said one market source.

Other regular issuers are looking to several monetary lifelines until the situation reverses itself, including fee income, equity investments and possible bank acquisitions. Specialty lenders, such as MRU Holdings, might even consider buying out a small bank, said Coblentz.

For its part, MRU Holdings said that it would consider selling whole loans to regional and sub-regional banks. Unlike money-center banks that have suffered write-downs in their MBS and CDO portfolios, regional banks did not have exposure to those assets. They are also seeing an increase in deposits, Coblentz said.

"Our prime credit-quality student loan assets, we believe, would be very attractive assets for a bank to own," Coblentz said. "That would be a real practical alternative for us, if it wasn't possible to access the securitization market."

GS Capital Partners, a subsidiary of Goldman Sachs, made a $59.8 million investment in First Marblehead, buying 5.3 million shares of convertible common stock. Goldman Sachs also offered to extend a $1 billion warehouse facility to First Marblehead.

The student loan provider will also raise money through fee income. On March 4, the company announced that it would offer a range of back-office loan processing services to for-profit schools and student loan providers. The services include borrower inquiries, Web applications, underwriting and servicing.

"You might characterize it as [issuers] searching for new pockets of liquidity or capital," one market source said. "They are going about it in nontraditional ways."

Estimated Student Loan Margins

Stafford Stafford

In-School Repayment PLUS Consolidation

Margin pre 10/1/07 1.74% 2.34% 2.64% 2.64%

SAP Cust post 10/1/07 -0.55% -0.55% -0.85% -0.55%

Servicing Cost -0.90% -0.90% -0.90% -0.50%

DOE Rebate 0.00% 0.00% 0.00% -1.05%

CP to LIBOR Spread -0.10% -0.10% -0.10% -0.10%

Cost of Funding -0.75% -0.75% -0.75% -0.85%

Available Margin -0.56% 0.04% 0.04% -0.41%

Source: JPMorgan Securities

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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