Sallie Mae’s sale yesterday of the residual interest in its SLM Student Loan Trust 2007-4 securitization that is backed by a portfolio of FFELP consolidation loans to a third party, should not impact the trust, said analysts at Bank of America Merrill Lynch.
The sale will remove student loan assets of $3.8 billion and related liabilities of $3.7 billion from Sallie Mae’s balance sheet, according to a press release by the Sallie Mae.
“We believe student loan ABS residuals could be attractive for investors looking for higher yielding assets,” said BofAML analysts in a report today. “Nevertheless, companies that traditionally hold residuals or first loss positions need to consider investors' sentiments regarding such sales. Many investors prefer to see sponsors retain a position in their ABS.”
But BofA analysts said that since Sallie Mae will continue to service the student loans in the trust under existing agreements, the sale won’t have any material impact on the performance of the issuer’s securitization trust.
The sale falls in line with plans that the Sallie Mae has outlined in past quarterly earnings calls and industry conferences. According to BofAML, Sallie Mae said yesterday that it would look at further sales of FFELP ABS residuals and that it would consider selling private student loan ABS residuals from its legacy business as well. Sallie Mae’s $31bn legacy portfolio is seasoned over four years.
In the near term, BofAML analysts anticipate that the company is more likely to sell FFELP ABS residuals than private student loan ABS residuals because Sallie Mae is winding down it FFLEP business and growing its private student loan business.
Also FFELP ABS residuals benefit from the guarantee provided by guaranty agencies and reinsurance provided by the Department of Education, along with more extensive loan performance history. These factors simplify the cash flow analysis of FFELP loans and should lead to better execution for FFELP ABS residuals than private student loan ABS residuals for the company, explained BofML analysts.
