Several factors have kept annual student loan ABS issuance in the healthy area of $44 billion for the last few years, including government guarantees that act as enticing forms of credit enhancement for much of the sector's underlying collateral.
Ironically, issuers of student loan ABS paper have never been able to consistently and uniformly provide investors or rating agencies with another critical measure of an underlying asset's reliability - prepayment speeds.
The industry is looking to change that, especially as the sector continues to generate a growing pipeline of deals, and the loans are used to secure a more complex array of structured finance transactions. Consistent prepayment data would influence SLABS pricing favorably, industry sources said.
"It is a challenge to compute the prepayment rate," said Matt Brinkman, director of the capital markets group at Nelnet. "Different issuers are presently calculating them differently, but that does not mean that they are doing it wrong."
One sure sign of coming change: a student loan issuer's group within the American Securitization Forum (ASF) is discussing ways to come up with a standardized way of calculating prepayment speeds on student loans, the organization confirmed. The group did not establish a timeline for the proposal, but a proliminary proposal will be presented internally to the ASF for further consideration.
Calculating SLAB prepays
Such a measure would not be easy to calculate, because the loans could either be consolidated, under forbearance or classified as in school,' wherein the student is still matriculated and has not begun paying off the loan. All of those moving parts, which can change the status of a student loan pool from month to month, have made it difficult for issuers and the industry to stick to a uniform method.
Nelnet, the Lincoln, Neb.-based lender, uses a simple method of calculating prepayments, Brinkman said. Each month it assesses the amount that borrowers are expected to pay on their student loans. After that month passes, Nelnet totals the amount that it actually collected, and comes up with the difference or the unscheduled principal, he said.
That is similar to the method used to measure prepayments in static pools of auto loans.
Several investment banks, such as Lehman Brothers, have weighed in on the issue by offering their own suggestions as to how issuers should calculate prepayments in their portfolios.
The investor community, however, which relies on prepayment information to help make ABS bond pricing and investment decisions in other asset classes, is behind the current push.
"This is a positive sign," said Joseph Astorina, a Barclays Capital analyst. "The investor community has been clamoring for more clarity on the prepay side."
The process of smoothing out prepay rates, however, might raise a thorny subject among SLABS issuers: how to account for CPR assumptions that might turn out to be lower than what outstanding deals actually experience, one market professional observed.
"To admit that these speeds are considerably higher than what they anticipated might have an impact on how that issuer is perceived in the debt market," a market source said.
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