With a split-senior note capital stack issuance, Nelnet Inc. has gained triple-A status from S&P Global Ratings for its seventh securitization in 2019 of legacy FFELP student loans carrying indirect guarantees from the U.S. Department of Education.
It’s only the second time this year S&P has granted its top structured-finance rating to a Nelnet Federal Family Education Loan Program transaction.
In three other Nelnet deals S&P rated involving Federal Family Education Loan Program student loans, the agency had issued senior ratings at AA+ because the single Class A-tranche structure of the deal did not provide enough enhancement under S&P's models - which factor in the AA+ long-term sovereign rating it has applied to the U.S. federal government since 2011.
Nelnet’s federally guaranteed student-loan asset-backed securities (SLABS) rely in part on the sovereign rating because the U.S. DOE provides a 97% guarantee on the loan collateral.
In the most recent NSLT transaction rated by S&P (2019-4, which priced in August), a single $408 million Class A tranche was rated AA+. But for the $420.8 million 2019-7, Nelnet split the Class A notes into two tranches – a $210.3 million Class A-1 tranche and a $200 million Class A-2 tranche. S&P assigned the AAA to the $210.3 million Class A-1 tranche, an AA+ to the $200 million Class A-2 note subordinate in the payment waterfall, and an A to a Class B tranche.
That split in the payment waterfall gives the senior-most notes a greater cushion against losses that would be first assigned the Class A-2 and the $10.5 million Class B tranche.
A similar split-senior notes offering for NSLT 2019-1 in January had also received AAA treatment from S&P, although the A-1 notes in that deal were limited to a $35.7 million issuance compared to the $448 million Class A-2 notes tranche.
Moody’s Investors Service maintained the Aaa rating for the NSLT 2019-7 Class A notes that it also has assigned previously rated Nelnet FFELP deals – as well as a Aaa rating for the Class B tranche.
Nelnet will use the proceeds to acquire approximately $425 million in FFELP loans for the deal, with a pool consisting of 58.05% Stafford loans, 38.85% consolidation loans, 1.93% Parent Loan for Undergraduate Students (PLUS), and 1.17% Parent Loan for Graduate Students and Supplemental Loans for Students (SLS).
Approximately 5.6% of the targeted loans are in deferment and 5.87% in forbearance. The presale reports note that 25% of the pool contains rehabilitated loans, which were formerly delinquent but have been brought into current payment status by borrowers. That is more than half the level of rehabilitated loans in Nelnet’s most recent 2019-6 transaction, according to Moody’s, which applied an expected gross default rate of 25% on the pool.
S&P has an expected net default rate of 18%-20% on the deal, unchanged from what it projected for NSLT 2019-4.
The new transaction was underwritten via RBC Capital Markets, BMO Capital Markets, Citigroup Global Markets and KeyBanc Capital Markets.
