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Milestone for private student loan bonds: Resecuritization

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Goal Structured Solutions is taking an unusual route to refinance a $149 million private student loan securitization it completed in 2016.

Rather than collapse the deal and bundle the underlying loans into collateral for new bonds, it is resecuritizing the notes issued in Goal Structured Solutions Trust 2016-B as well as the residual interest in the original deal.

Like securitization itself, resecuritization is often used to convert risky assets into securities with different ratings, some of them safer than the underlying assets. But that does not appear to be the case here, because the student loan bonds Goal issued in 2016 were performing well. The three tranches of notes being resecuritized were rated AAA, AA and A by DBRS at issuance, and have never been downgraded.

Rather, resecuritizing the transaction allows Goal to benefit from a reduction in spreads over the last two years. So even though interest rates are higher, the sponsor may be reducing its funding costs. It is also borrowing more heavily against the assets, and offering less credit enhancement on the new notes being issued.

Goal is able to resecuritze the original notes because the 2016 deal gave the holder of the residual interest, presumably Goal itself, the option to call the transaction by purchasing the notes starting in June 2018. This is unusual; more typically, student loan bonds can only be called - by the servicer - once collateral has declined to below 10% of original principal balance.

The deal is backed almost exclusively by legacy private student loans that Goal acquired from Navient Corp. The weighted average seasoning of the loans is 86 months and the weighted average remaining term is 173 months. Nearly 81% of the loans have co-signers, which generally experience lower default rates than loans without co-signers. And borrowers had a weighted average FICO score, when the deal was issued, of 754. When the original deal was issued, DBRS expected 7.2% of the loans to default over the life of the deal, in its base-case scenario.

The credit enhancement for the original deal consisted primarily of overcollateralization; at closing the balance of the collateral was 14.5% higher than the balance of the notes. After closing, this was to build up to 20%, subject to a floor of $22,483,788. There was also $1.290,688 non-declining reserve account that was fully funded at closing.

The new notes to be issued carry the same ratings from DBRS as the original notes: $105.2 million of Class A-1 notes are provisionally rated AAA; $8.1 million of Class A-2 notes are rated AA; and $6.1 million of Class B notes are rated A. The trust will also issue $100 million par amount of residual certificates. All of the rated notes pay a floating rate of interest pegged at a discount to the prime rate (as opposed to a premium to Libor) and have a legal final maturity of August 27, 2051.

The initial total overcollateralization for the new notes will be just 9.29% at closing and will only build to 16%, subject to a floor of $4,607,994. And the reserve account, which will be fully funded at closing, will be equal to 0.25% of the initial principal balance of the notes.

The provisional ratings on the notes are contingent upon the execution of an amendment to Goal 2016-B that eliminates subordinate transaction fees, extraordinary expenses and indemnity payments paid after the payment of principal on the underlying notes in the priority of payments. "This benefits GAM Resecuritization 2018-B by effectively capping the amount of fees that may otherwise reduce GAM Resecuritization 2018-B available funds," DBRS states in its presale report.

Navient continues to service the underlying student loans; Turnstile Capital Management is the underlying master servicer.

Goal is reserving the right to refinance the deal a second time; the new notes can be redeemed as early as May 2020.

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