Navient Solutions has approached the market with $780 million securitization of Federal Family Education Loan Program (FFELP) loans, following a similarly structured transaction completed in early August. In a report published Oct. d12, Moody's Investors Service highlighted the elevated risk to those assets during the current pandemic.
The three major social-risk subcategories for student loan asset-backed securities (SLABS)—demographics and societal trends, customer relations and responsible production–expose the deals to disruptions or delays in cash flows, higher defaults and increases in legal costs, according to the report, titled "Student loan burdens drive high social risk." The report adds, "Vulnerability is greatest for FFELP deals, reflecting the high use of payment plans among borrowers."
Moody's says in its pre-sale report for Navient Student loan Trust 2020-2 deal that FFELP loan performance could weaken due to an unprecedented spike in the unemployment rate, limiting borrowers' income and ability to service debt. FFELP loans are indirectly guaranteed by the U.S. Department of Education. However, Moody's notes, challenging economic times could prompt borrowers to take advantage of state and federal assistance programs, including forbearance, deferment and income-based repayment, adversely impacting scheduled cash flow to borrowers.
In turn, that increases the risk of slower collateral amortization and the notes not being repaid by their legal final maturities, Moody's says in the pre-sale report. However, it adds, "the maturity risk is partially mitigated in this transaction by the long maturity dates of the notes and by the full turbo feature," in which after October 2026 the transaction will start to use any excess collections to pay principal to the notes.
Economic recovery is underway, but it is tenuous, Moody's says, adding, "As a result, the degree of uncertainty around our forecasts is unusually high."
The Navient deal is split into a fixed-income tranche and two floating-rate portions, similar to the August transaction that priced when prospects for additional federal stimulus were better. In that deal, according to Finsight, the $10.8 million Class B notes priced at one-month Libor plus 225 basis points, while $485 million in floating-rate notes priced at one-month Libor plus 105 basis points, and a $275 million, fixed-rate tranche priced at swaps plus 105 basis points.
The Moody's research report notes that student debt borne by households across the country has been rising for years, reaching $1.6 billion and second only to home mortgages in terms of household consumer debt. A longer-term risk for SLABS investors, the report says, is that "The high and growing aggregate student debt has catalyzed some lawmakers' support for borrower and relief measures."
