Student loan servicer Nelnet and the Connecticut-based Darien Rowayton Bank are offering a combined $623.33 million in notes backed by student loans, according to rating agency presale reports.
Nelnet’s $399.39 million offering is backed by federally guaranteed loans through the Federal Family Education Loan Program. FFELP loans are reinsured 97% by the US Department of Education, providing substantial loss protection to the transaction.
The transaction, Nelnet Student Loan Trust 2017-2, consists of just one senior tranche rated triple-A by Moody’s and ‘AA+’ by S&P Global Ratings. The notes are slated to mature in September 2065 and will pay interest at a floating rate over one month LIBOR.
A higher concentration of rehabilitated loans caused Moody’s to increase its net loss expectation to 0.71%, up 9 basis points from the previous Nelnet securitization this year.
Rehabilitated loans are loans made to borrowers who previously defaulted but are now making timely payments. This type of loan comprises 19.5% of the total pool, compared to just 10% in the previous Nelnet securitization.
Although rehabbed loans are also subject to 97% government insurance provided by the DOE, default rates are typically significantly higher for rehabilitated loans than non-rehabilitated loans.
In addition to the risk associated with the high concentration of rehabbed loans in the deal, there is also basis risk from an interest rate matchup between the notes and loans. While the interest rate for the notes is indexed to one month LIBOR, 3% of the loans are indexed to the 91-day Treasury bill.
Nelnet is one of the largest servicers of FFELP loans and a large servicer of the government’s Direct Loan Program. As of March 31st, it has managed or serviced over $200 billion of student loans.
In contrast to the Nelnet transaction, Darien’s $232.9 million deal is backed in full by private student loans, which do not benefit from a government guarantee. It is the sponsor’s ninth private student loan securitization, and the first under its rebranded offering shelf, Laurel Road.
Laurel Road Prime Student Loan Trust 2017-B will issue two triple-A rated senior tranches, a class-B tranche rated ‘A1’, and a class-C tranche rated ‘A2’ by Moody’s. All four classes of notes will mature in 2042 and pay a fixed rate of interest.
All of the loans in the transaction are refinanced loans originated by Darien to borrowers who have or are working toward prestigious degrees.
According to Moody’s, refinanced loans are less likely to default since the borrowers have already established a payment history. Almost all of the loans (97%) were made to borrowers who used or are currently using the loans to pay for college or graduate school, have high incomes, and want to consolidate their debt. Approximately 78.6% used the loans to finance medical, dental, nursing, law, or business degrees. The average annual income in the pool is $189,050, and just under 32% have annual incomes greater than $210,000.
Borrowers in the pool have a high average FICO of 769.
Moody’s expects cumulative net losses to be just 2%, down four percentage points from prior Darien securitizations. According to Moody’s, the lower loss expectation on this deal comes from continued strong loan performance of prior Darien deals in comparison to other student loan securitizations and other types of loans to borrowers with high FICOs, particularly auto loans to borrowers with strong credit.
Founded in 2006, Darien Rowayton Bank provides commercial, residential, and consumer loans as well as insurance product offerings. It has originated loans in all 50 states with a cumulative origination volume greater than $2.6 billion.
