Social Finance has upped protections for investors in the senior tranches of its latest student loan securitization, earning a higher credit rating for the deal.
It appears that investors are willing to pay up; the fixed-rate senior tranche is being talked at a spread of 110 basis points over swaps; that’s 15 basis points inside the swaps plus 125 basis points that SoFi pays on the same tranche of its previous deal, completed in January.
Like Sofi’s first four deals, the $411.9 million Sofi Professional Loan Program 2015-B is backed by collateral that is safer, by many measures, than other private student loan securitizations. Most of the loans were to borrowers refinancing debt used to pay for graduate school. Most received medical, law or master in business administration degrees from top-tier schools.
The SoFi 2015-B loan pool also has a weighted average remaining term of 129 months, compared with terms of 180 to 300 months for most other private student loan pools.
And SoFi’s refinancing loans enter repayment immediately after origination; while other private student loan securitizations are backed by in-school loans that borrowers may defer for several years.
What has changed to make the senior bonds even safer is the structure of the deal, which will be rated by Standard & Poor’s, Moody’s Investors Service, and DBRS. The class A notes have a targeted overcollateralization level of 18.86%, compared with just 11.94% for the class A notes of SoFi’s previous deal, 2014-A. Initially, the amount of assets in the collateral pool exceeds the value of notes being issued by 6.7%, providing a cushion for all noteholders. But for the first six months, some of the interest collected on these assets will be used to pay principal of the class A notes, effectively increasing the overcollateralization of this tranche.
Moreover, there is likely to be more interest income available to be diverted to class A noteholders. That’s because there is a wider margin between the interest on loans used as collateral and the interest paid on the notes. The margin, which is known as “excess spread,” is approximately 9.3%, compared with 8.4% for SoFi’s pervious deal.
The senior, $146.7 million A-1 floating-rate tranche with a weighted average life of 3.75 years earned a preliminary is rated Aa3’ from Moody’s. The $235.4 million A-2 fixed-rate tranche with an average life of 3.59 years is rated Aa2’.
(Moody’s will assign a higher rating to the floating-rate notes because it expects them to perform better if interest rates rise; the variable-rate loans in the collateral pool have their interest rates capped, while the class A-1 notes do not; this can reduce the amount of excess spread available to the class A-2 notes.)
By comparison, Moody’s assigned a A2’ rating to the class A notes of SoFi’s previous deal.
Moody’s plans to assign a Baa3 rating to the $29.8 million class B notes, which have an average life of 5.14 years.
The initial servicers for the deal will be Missouri Higher Education Loan Authority (78.5%) and Tru Student (21.5%); the Pennsylvania Higher Education Assistance Agency is acting as backup servicer for Tru Student.
Morgan Stanley, Goldman Sachs, Credit Suisse Securities and Deutsche Bank Securities are the initial purchasers.
