SoFi Lending Corp. is testing the market for private student loans to slightly riskier borrowers.
It’s marketing another $130.66 million of bonds backed primarily (89%) by refinance loans to present and former graduate students. Unlike the sponsor’s 12 previous student loan securitizations, however, this one is backed by a substantial proportion (approximately 66%) of loans with credit scores below than 680, according to Moody’s Investors Service.
And, unlike SoFi’s past several deals, this one does not carry Moody’s highest credit rating.
SoFi Professional Loan Program 2016-F will issue two tranches of senior notes: $40.66 million of floating-rate notes and $82.8 million of fixed rate notes; both are rated A2. There is also a $7.2 million subordinate fixed-rate tranche rated Baa2. All of the notes have a legal final maturity of February 2040.
By comparison, the senior tranches of the last several deals were rated AAA.
In general, borrowers refinancing student loans are typically less likely to default than borrowers in school and those that have recently entered repayment, regardless of their credit scores, because borrowers who are refinancing have an established a payment history.
And while borrowers with scores below 680 are generally considered to be subprime, the credit quality of the collateral for this deal is high, by other standards. For example, the average verified annual income at origination was $152,612, and the borrowers had average monthly free cash flow of $6,244, excluding loans in school.
Lower credit scores aren’t the only unusual risk factor, however. Approximately one fifth of the loans were made to the employees of a single employer, an unidentified Fortune 500 technology company. And these loans were made using less stringent underwriting criteria. The loans have lower minimum free cash flow and real excess cash flow requirements. Furthermore, the borrowers do not have to be a U.S. citizen or permanent citizen. No surprise, these loans are concentrated within the 680 credit score and above segment of the pool. This concentration creates an additional layer of risk, since financial difficulties at this firm could have a disproportionate impact on the credit quality of the pool.
But there’s a third reason that the large proportion of borrowers with lower credit scores contribute to the risk of the deal, according to Moody’s: They are less likely to prepay their student loans.
Moody’s expects SoFi loans with a credit score greater 680 to make a high level of voluntary prepayments, at a rate of 10%-12%, which is significantly above the low single-digit rate among loans from other private student loan lenders. But it expect SoFi loans with a credit score less than or equal to 680 to make a lower level of voluntary prepayments, at a rate of 6% -7%.
Moody’s cumulative net loss expectation for SoFi 2016-F's loan pool is approximately 9.25%. It expects an annualized default rate of 1.6% for the refi loans with a credit score higher than 680 and the Parent and PLUS loans and an annualized default rate of 2.7% for the refi loans with credit score of 680 or less. Lifetime recoveries on defaulted loans are expected to be approximately 20%.
Morgan Stanley and Mizuho Securities are the initial purchasers of the notes to be issued.
The Higher Education Loan Authority of the State of Missouri is the servicer.
