The South Carolina Student Loan Corp. is marketing what may be the first securitization of federally guaranteed student loans since rating agencies put a broad swathe of the market under review for potential downgrades over the summer.

While federally guaranteed loans account for less than half of the deal’s collateral, many of these loans are delinquent or have been modified.

South Carolina Student Loan Corp. (Series 2015-A) will issue a single, $198.4 million tranche of notes with a preliminary ‘A’ rating from Standard & Poor’s. Proceeds will be used to acquire a mix of $203.84 million of private student loans and $46.53 million of loans made under the Federal  Family Education Loan Program (FFELP).

Morgan Stanley and Bank of America Merrill Lynch are the lead underwriters.

South Carolina Student Loan Corp. will provide the day-to-day servicing; Nelnet is the backup servicer.

Notably, neither Moody’s Investors Service nor Fitch Ratings, which are reviewing some $37 billion of FFELP-backed bonds for potential downgrades, have issued presale reports on the deal. Moody’s and Fitch are both concerned that a slowdown in loan repayments put the bonds at risk of not paying off before they mature.

However, the deal incorporates a feature known as a full turbo payment structure that both Moody’s and Fitch have endorsed as a way to address the risk of maturity default. This feature builds overcollateralization, or the level at which trust assets exceed the principal of notes issued by the trust, from 20.76% at closing.

There is also a fully funded reserve account, which equals 0.25% of the initial pool balance at closing and is required to be maintained at 0.25% of the outstanding loan balance and subject to a floor of 0.15% of the initial pool balance, or $375,550.

Among the FFELP loans, 14.5% are in forbearance, 9.7% are in deferment, and 75.8% are in repayment; none of the borrowers are in school or in a grace period following graduation. But only 31.9% of loans are current; the rest are delinquent.

The private student loans in the pool are made to borrowers with strong credit; they have a weighted average FICO of 739 and have been making payments for 55 months, on average. Nearly 80% the loans have a co-signer.  

However a not insignificant portion of these loans, 13.9%, are also delinquent.

S&P expects that between 12% and 13% of the private student loans and a similar portion of the performing FFELP loans, 12.5% to 13.5%, will default. It expects as many as half of the FFELP loans will default.

While that might make the FFELP loans seem riskier, the government guarantees at least 97% of the principal and interest of these loans. So upon default, investors will get most of their investment back. The bigger risk in FFELP-backed securities is that borrowers take advantage of generous repayment programs to stretch out payments so long the bonds don’t pay off before they mature.

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