Sallie Mae Bank is returning to the securitization market for the first time since Moody’s Investors Service and Fitch Ratings put billions of dollars of federally guaranteed student loans under review for possible downgrades.
The $701 million SMB Private Education Loan Trust is backed by Sallie Mae’s Smart Option loans to borrowers in undergraduate and graduate programs. These loans are not guaranteed by the U.S. government.
Moody’s expects to assign ‘Aaa’ rating to four tranches of senior notes: a $199 million floating-rate tranche with a final maturity of July 2022, a $207 million fixed-rate tranche maturing in July 2027, a $100 million floating-rate tranche maturing in 2027, and a $75 million floating-rate tranche maturing in 2032.
There are also two subordinated fixed-rate tranches, one for $70 million maturing in 2043 is provisionally rated ‘Aa3’ and one for $50 million maturing in 2046 is rated ‘A3.’
In its presale report, Moody’s noted that Smart Option loans are typically of higher credit quality than the Signature loans Sallie Mae previously originated, as the Smart Option loans have higher FICO scores and a higher percentage of co-signers. Unlike Signature loans, a portion of Smart Option loans are made to borrowers who choose to make payments while they are in school.
This is only the fourth private student loan securitization by Sallie Mae, which split from Navient in 2014, and only the third deal to be serviced by the bank. The presale report notes that the bank does not currently have the capability to collect on defaulted loans. It intends to develop this capability but for now will depend on sales of defaulted loans to third parties at a significant discount.
The market for private student loan bonds remains under pressure from concerns about potential downgrade of bonds backed by federally guaranteed student loans, even private student loan securitizations are not at risk.
Concerns about the performance of Federal Family Education Loans spilled over to the private student loan market, even though private student loans are generally underwritten to stricter standards and have been performing well. Over the summer, Moody’s and Fitch flagged concerns that FFELP borrowers are paying back their loans at such a slow pace that some bond backed by these loans may not pay off by their final maturity, which is an event of default. This prompted a selloff in securities backed by both federally guaranteed and private student loans.