Sallie Mae Bank is marketing its second and likely last private student loan securitization of the year. The company recently said it’s increasing its reliance on deposits to fund lending.
The $676 million transaction, dubbed SMB Private Education Loan Trust 2017-B, is Sallie Mae’s ninth term securitization overall. The bank completed three deals each in 2016 and 2015, and one in 2014.
Four tranches of notes will be issued in the latest transaction; three senior tranches provisionally rated Aaa by Moody’s Investors Service benefit from initial credit enhancement of 17.5%. That’s up from 16.8% for the comparable notes in the previous deal, completed in February. However, this level builds to a target of 30%, unchanged from previous deal. Moody’s did not provide any explanation for the higher initial level in its presale report.
There is also a single subordinate tranche rated Aa2.
SMB 2017-B's loan pool contains about 9.3% of loans originated to borrowers attending a for-profit school, slightly lower than the 9.9% of SMB 2017-A's. Borrowers attending a for-profit school generally default at a higher rate than borrowers attending a not-for-profit school.
SMB 2017-B's loan pool includes 72.6% of loans originated to borrowers who are in school, grace, or deferment, higher than the 65% for SMB 2017-A's. Of those loans, 37.7% are loans originated to borrowers currently making either interest-only payments or fixed monthly payments of $25.
The majority of loans used as collateral, 91.9%, are co-signed by the borrower’s parent; the remaining 8.1% are not co-signed.
Moody’s expects cumulative net losses to reach 9% over the life of the transaction.
Among the risk factors to the deal is the fact that Sallie Mae’s servicing unit is relatively small in scale and has limited capacity to collect on defaulted loans. As a result, it may decide to sell a portion of defaulted loans at a discount, limiting investor recoveries.