Sallie Mae said that it will continue to issue Federal Family Education Loan Program (FFLEP) ABS to finance the redemption of all legacy FFELP loans previously sold into the U.S. Department of Education’s Straight-A conduit program.
The student loan lender said on Wednesday when it reported 4Q 2012 and full year 2012 financial results, that it expects to redeem all of these loans prior to the conduit program’s Jan. 19, 2014 maturity date. At Dec. 31, 2012, the company held $125.6 billion of FFELP loans.
Student loan ABS issuance in 2012 was mainly from term securitizations of FFELP auction-rate refinancing and student loans in the Straight-A conduit. During fourth-quarter 2012 Sallie Mae issued $2.8 billion in FFELP asset-backed securities (ABS) and $976 million in private education loan ABS.
For the full year 2012, Sallie Mae issued $9.7 billion in FFELP ABS, $4.2 billion in private education loan ABS, and $2.7 billion of unsecured bonds.
Although the student loan lender did not indicate in its earnings report if it planned to boost its private student loan securitizations in 2013, chief financial officer Jonathan C. Clark said in a conference call discussing fourth-quarter results, that pricing for the company’s private loan ABS deals improved nearly 100 basis points compared to the beginning of the year; according to a Bloomberg report.
That demand for higher yielding assets has particularly benefited the private student loan ABS market because this asset class has not rallied as much as other credit sensitive securitized products, according to Bank of America Merrill Lynch analysts in a Jan. 11, research note.
John McElravey, head of consumer ABS research at Wells Fargo Securities said in a Jan. 16, report that new FFLEP student loan ABS seems to be at tighter pricing spreads based on strong demand. Clark noted on Wednesday's call that pricing improved by 40 basis points on Sallie Mae's FFLEP deals since the start of the year.
However, McElravey said that investors remain concerned on how weaker credit conditions, on the back of slow economic growth, will affect consumer ABS structures. For FFLEP deals in particular, concerns over the debt ceiling and another U.S. downgrade could lead to some spread volatility down the line. A downgrade for the U.S. would also impact the ratings of most FFELP ABS.
“We believe that there is the potential for renewed spread volatility, particularly among subordinated bonds or FFELP student loans, to the extent that financial markets might react adversely to poor government policy choices or additional sovereign rating downgrades,” said McElravey.
Student loan ABS issuance is expected to reach $20 billion in 2013, a jump over last year's volume with $4 billion of that backed by private-label student loans and the rest guaranteed by the Federal Family Education Loan Program .