Online lender Earnest is marketing its second ever offering of bonds backed by loans used to refinance student debt.
Earnest, based in San Francisco, competes with lenders such as SoFi Lending, Darien Rowayton Bank and CommonBond in offering loans to borrowers who will graduate within six months of issuance of the loan or who have already graduated with an undergraduate or graduate degree and demonstrate a strong ability to repay their debt. However the company has an even shorter track record than its peers; it was founded in 2013 and has only been lending since 2034. As of March 31, 2016, Earnest had funded approximately $593 million of student loans to 8,600 borrowers.
The company’s latest deal, EARN 2016-B will issue three tranches of notes totaling $188.5 million with preliminary ratings from DBRS: two tranches of class A notes, one fixed-rate and one floating-rate, are rated single-A; a single tranche of fixed-rate class B notes are rated triple-B.
The variable-rate class A-1 notes will be primarily secured by a group of variable-rate loans and mature and have a final legal maturity of February 2035; the fixed-rate class A-2 notes will be primarily secured by a group of fixed-rate loans and mature in May 2034; and the class B notes will be secured by both the fixed-rate and variable-rate loan groups and mature in September 2036.
Initial overcollateralization for the class A-1, class A-2 and class B notes will be 11.15%, 11.15% and 7.18%, respectively; that is slightly less than the subordination levels on Earnest’s previous deal, completed in January, which carried the same credit ratings from DBRS. Similar to the previous deal, the class A notes also benefit from a structural feature that diverts excess funds to repay their principal is certain performance triggers are breached.
The quality of the collateral is also in line with that of the previous deal. Borrowers have a weighted-average credit score of 774 and a weighted average income of $135,204.
Approximately 77.5% of the pool by outstanding principal balance consists of loans made to borrowers that obtained a graduate degree; that’s down slightly from 81% of borrowers in the previous transaction. Loans made to graduate students have historically defaulted at much lower rates than loans made to undergraduate students.
According to Earnest, since the inception of its student lending business, there have been no loans more than 60 days delinquent and six hardship forbearances granted.
Earnest is the transaction’s servicer; the Higher Education Loan Authority of the State of Missouri acts as the hot back-up servicer for this transaction and will assume the servicing responsibilities of Earnest under certain circumstances.
