Rhode Island’s Student Loan Authority appears to be stepping up the pace of refinance lending.

It is planning its first offering of $35 million of fixed-rate taxable revenue bonds that will be used exclusively to fund loans refinancing the student debt of borrowers who have already graduated and are gainfully employed. The bonds will be the first issuance from a 2018 master trust indenture, which was created for this transaction. Previously, RISLA had funded refinance loans with the same tax-free bonds used to fund in-school lending.

S&P Global Ratings expects to assign an AA to the single tranche of notes to be issued; the maturity has yet to be determined.

Merrill Lynch, Pierce, Fenner & Smith is the underwriter.

RISLA has until July 1, 2019, to put the money to work. It offers refinance loans with five, 10- or 15-year terms. The loans enter repayment 15 days after the loans being consolidated are paid off. The bonds are not asset-backeds, but are RISLA's limited obligations and are payable solely from the student loan pool and other assets pledged to the trustee for the bondholders' benefit.

The initial pool of 682 borrowers with a combined principal amount of $29 million has an average outstanding balance of $42,672, a weighted average coupon of 5.46%, and a weighted average remaining term of 119 months. Sixty-nine percent of the loans are co-signed; eligibility requirements for the purchase of additional loans do not allow this level to fall below 50%.

Most borrowers, 98%, are in repayment, 1.1% are in school and 0.9% are deferring repayment.

S&P expects between 10% and 11% of the collateral to default over the life of the transaction.

RISLA was the first nonprofit in the U.S. to follow enter this market, which was pioneered by fintech lenders such as Social Finance and CommonBond. The state student loan agency offered its first refinance loan in July 2014. Initially, it could only use proceeds from tax-exempt bonds to refinance in-school loans it had made itself. However, in November 2015 the Internal Revenue Service gave all state student loan agencies the green light to use tax-exempt funding to refinance student loans for anyone who lives or attends college in-state, regardless of the original lender.

RISLA has to date originated approximately 1,593 refinance loans totaling $74.5 million, according to S&P.

RISLA was last in the market in April with a $75 million offering of bonds that funded a mix of in-school, parent loans and refinance loans. That deal had a more complicated capital structure; seven tranches of notes with maturities ranging from 2020 to 2034 were offered and all had 17.1% credit enhancement.

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