With a refinancing wave currently in full swing in the student loan sector of the ABS market, Sallie Mae is in the market with its first-ever consolidation loan ABS and more are on the horizon, sources said. The eighth securitization from Sallie this year actually incorporates two other notable firsts: Sallie's first-ever auction-rate securities and its first foray into the European markets.

Totaling roughly $1.9 billion, $1.33 billion of the 2002-7 offering is term ABS, with the remaining $659 million being sold in the auction-rate market. The dollar-denominated classes follow the standard blueprint for Sallie transactions, with one, three and seven-year three-month Libor-indexed seniors. For the less myopic European appetite, Sallie has included a E500 million floating-rate A5, with a 10.8-year average life, indexed to three-month Euribor.

In total, 12 tranches are being offered on a global basis through Credit Suisse First Boston and Salomon Smith Barney as joint lead managers. The selling group also consists of Deutsche Bank Securities and Lehman Brothers as global co-managers. HypoVereinsbank is European co-manager.

This offering is modeled with a slower prepayment assumption than standard student loan product, as consolidation loans are almost void of refinance activity. Aside from a borrower pre-paying the balance of the consolidated loan, the only other prepayment threat comes in the form of default, as insurer FFELP would make the trust whole in the event of borrower default.

According to the Fitch Ratings presale report, CPR for 2002-7 is 4%, versus the standard 7%, at which most student loan transactions pay. Investors on both sides of the pond noted the increased stability of the collateral, as borrowers are given just one shot to consolidate their student loans after graduation.

The addition of the auction rate classes made sense for Sallie, as it has always been the avenue of choice for student loan consolidation lenders. Because the rates reset on a monthly basis, auction rate investors are not locked into interest rates for the same length as their term counterparts.

The largest concern - other

than the basis risk between

asset/liability basis risk inherent

in student loan ABS - is that

consolidation loans are subject to a 1.05% annual rebate to the Department of Education, according to Fitch, squeezing excess spread. The rebate "can decrease excess spread significantly when loans rely on special-allowance payments (SAP) during a high interest-rate environment," Fitch says.

76.6% of the loans in the pool are subject to a SAP of 2.64% plus 90-day

commercial paper; 23.1% are subject to 3.10% plus 91-day Treasurys. As interest rates increase, the Dept. of Ed rebate becomes all the more important

to the enhancement. To combat this, the trust builds up floor income as long as three-month T-bills are under 6.31% and 90-day CP is below 5.64%.

This is not the first first' for Sallie Mae this year, as in October, Sallie Mae sold its first-ever large-loan student loan ABS, backed primarily by non-guaranteed graduate school loans. The 2002-A offering priced via Merrill Lynch.

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