The Pennsylvania Higher Education Assistance Agency is making its first trip to the securitization market in over a year.

It’s also first time the authority has marketed bonds backed by federally guaranteed student loans since Moody’s Investors Service and Fitch Ratings raised the alarm about the slowing rate of repayment on this collateral. Last year, the two rating agencies warned that increased use of generous repayment plans for Federal Family Education Loans put many FFELP bonds are risk of not paying off at maturity.  Both have amended their ratings criteria and are in the process of reviewing ratings on billions of dollars of existing securities.

The upcoming transaction, PHEAA Student Loan Trust 2016-1, will issue two tranches of notes; $533.9 million of senior class A notes have a preliminary ‘AA+’ rating from S&P and an ‘AAA’ from Fitch Ratings; $11.6 million of subordinated notes are rated ‘A’ by Fitch. S&P is not rating the subordinated notes.

Both tranches have a legal final maturity of September 2065.

Bank of America Merrill Lynch, J.P. Morgan, Morgan Stanley, Siebert Cisneros Shank & Co., and Boenning & Scattergood are the underwriters.

Manufacturers and Traders Trust is the lender trustee, which holds legal title to the loans on behalf of the securitization trust, which does not meet the Department of Education’s criteria for an “eligible lender.” Failure of the student loans to be owned by an eligible lender such as a banks, savings and loan association, credit unions or insurance company, may invalidate the federal guarantee.

Nearly three quarters of the collateral (24%) are consolidation loans and just under a quarter (24%) are Stafford loans. The remaining loans are either Parent Loan for Undergraduate Students or Supplemental Loans for Students. About 18.6% of the loan pool consists of loans that were once delinquent but have made at least nine timely payments. So called rehab loans tend to default more frequently than loans that have always been current, but both benefit from the same government guarantee of at least 97% o of the principal.

Fitch assumes that 23% of loans in the collateral pool will default, in its base case scenario, and that the Department of Education will reject 0.25% of these claims.

The deal is structured with several forms of investor protection to offset the risk that not all claims will be paid. The value of assets in the collateral pool is 1.5% greater than the value of notes to be issued. Also, a portion of the proceeds from issuance of notes will be used to fund a reserve fund equal to 0.25% of the principal amount of the pool balance, or approximately $1.32 million.

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