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Nelnet ups exposure to rehabbed loans in next FFELP securitization

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Nelnet’s next federally guaranteed student loan securitization has higher exposure to “rehabbed” loans than its previous two transactions. Borrowers who were once delinquent but are now making timely payments account for a quarter of the collateral.

By comparison, the student loan servicer's previous deal, completed in July, was backed entirely by loans to borrowers who had never fallen behind on payments, and a May deal had just 16% exposure to rehabbed loans.

The $489 million Nelnet Student Loan Trust 2018-4 also features a capital structure that the sponsor revived in its prior deal: two separate classes of notes. There are two tranches of Class A notes and a single tranche of Class B notes, all of them rated Aaa by Moody’s Investors Service.

The only difference that can be gleaned from Moody’s presale report is that the Class A notes rank higher in payment priority when it comes to principal. But both classes have the same payment priority when it comes to interest payments.

Despite the distinction, Moody’s is comfortable assigning its top ratings to both classes of notes.

Credit support for the notes includes excess collateral, which will exceed the value of the notes by $14.3 million at the deal's closing. The overcollateralization results in a starting parity (total assets/total liabilities) of 102.88% There is also a reserve account of about $6.2 million, which represents 1.25% of the initial note balance.

One of the primary risk to the deal, according to Moody's, is the exposure to rehabbed loans, which typically have higher net loss rates than do pools of nonrehabilitated loans. Although the rehabilitated loans benefit from the same degree of federal guarantee — 97% of the defaulted principal and accrued interest — they are expected to default at a significantly higher rate than non-rehabilitated loans because the borrower has previously defaulted.

That’s why Moody’s Investors Service expects net losses over the life of the latest transaction to be 0.89%, which is higher than the cumulative net loss expectation of 0.53% on the prior transaction. NLST 2018-3 and 0.75% for NLST 2018-2. (However, Moody's cumulative net loss expectation for Nelnet's first deal of the year, which had 50% exposure to rehabbed loans, was higher, at 1.15%.)

The composition of the entire pool as of the statistical cutoff date by principal balance was about 29.8% Stafford loans, 67.4% consolidation loans, 2.8% PLUS loans and less than 1% SLS loans. The average outstanding principal balance per borrower was $30,253, the weighted average borrower interest rate was 5.67% and the weighted average remaining term to maturity was 208 months. Approximately 24.9% of the loan pool includes borrowers who qualified for Income Based Repayment Partial Financial Hardship.

The total use of deferment, forbearance and income-based repayment in NSLT 2018-4 is 45.6%. There is minimal overlap among borrowers who are in deferment, forbearance and income-based repayment, according to Moody's.

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