A mix of rehabilitated and non-rehabilitated loans is securing the PHEAA Student Loan Trust 2021-1, which will issue $665 million in asset-backed notes. The transaction is the Pennsylvania Higher Education Assistance Agency's (PHEAA) first asset-backed securities (ABS) transaction secured by Federal Family Education Loan Program (FFELP) loans since 2018.
While the pool is mixed, non-rehabilitated loans made up the overwhelming majority of the pool, at 96%, according to Moody’s Investors Service. Several deal characteristics lend confidence from a credit perspective, and not just because the Department of Education insures the notes for at least 97% of defaulted principal and accrued interest.
The capital structure also features a reserve account, likely to be funded at $20.1 million when the deal closes. Also, servicing risk is expected to be low, because of PHEAA’s experience and expertise in the area.
Yet the deal has some pockets of potential issues. The U.S. economy’s recovery from the COVID-19 pandemic remains uneven, and Moody’s expects that condition to continue through 2021. There is also the matter of basis risk, where a mismatch between the interest rates on the ABS notes and the underlying loans.
Some 70.6% of the notes from the trust are indexed to the one-month Libor. While 97.5% of the loans have their special allowance payments pegged to the same index, the rest of the collateral is pegged to the 91-day Treasury bill.
The capital structure is comprised of fixed- and floating-rate notes, all of which are expected to receive ‘AAA’ ratings from Moody’s.
