South Carolina Student Loan Corp. last week closed a $150 million deal with a $40 million tranche benchmarked on the 90-day commercial paper index, a move that alleviated a good deal of the basis risk on the transaction and will likely set a trend for student loan securitizations going forward.
"I think that the large issuers of student loans would seriously consider having a CP index piece on their next deal," said Charles Ryan, syndicate manager for asset-backed securities William R. Hough & Co., which was the underwriter on the deal.
The primary advantage of using the commercial paper index to benchmark student loans is the fact that it reduces, if not elimates the basis risk on student loan transactions.
On January 1, 2000 Congress passed a law changing the index used to calculate special allowance payments from the Treasury Bill Index to the 90-day Commercial Paper Index. In basing student loan securitizations on the CP index, one eliminates the basis risk by basing both the asset and the debt on the same benchmark.
Though in the South Carolina deal there was more investor interest in the bonds that were benchmarked on Libor, Loren Carlson, senior vice president at William R. Hough, said he is hopeful that going forward investors would be more open to student loan deals based on the CP index.
According to a Banc of America's daily research report, investors who opted for the CP-based index received a five to eight basis point concession to the class benchmarked on Libor, after considering the swap. It said that this positive yield pick-up may likely become more popular to the traditional arbitrage accounts.
The report stated further that it could be argued that the CP index can better show investors' funding costs than investments benchmarked on the Libor, specifically in stressed scenarios. For student loan lenders, meanwhile, it would be beneficial for them to fund themselves with the CP index because most of their loans accrue rates based on this index.
