Slower issuance might characterize the U.S. ABS market, resulting in break-even numbers at best by yearend. The student loan sector, for its part, however, is well on its way to having another record-breaking year of production.
Issuance hit $21.7 billion for the second quarter, a 33.9% increase over the $16.2 billion in deals that the sector did for the first quarter, according to ASR's most recent figures. By yearend, Standard & Poor's said that student loan ABS issuance should increase by 5% in 2006 over 2005's totals of $69.7 billion.
June was a tremendous month for the student loan ABS sector, in terms of volume. Fifteen new deals, representing some $12.9 billion were closed, pushing June 2006 totals up 35% over the same period last year, according to the Fitch Ratings' report released last week called The Student Loan Report Card.
State agencies and authorities issued $3.6 billion in student loan ABS paper, up from $2.6 billion in 2005, according to S&P. Historically, growth from the state agencies/authorities compartment grew because several issuers had asked the rating agency to rate the student loan revenue-backed bonds under their existing master indenture programs. This time, municipal issuers simply put together larger deals. Also, while many state agency and authority issuers historically issued auction rate debt, some market professionals worried that the auction market would not be able to absorb all of the growth. Therefore, issuers turned to the Libor market - which is much deeper than the auction rate arena - to absorb the debt.
While demand for student loans continues to drive volume in the sector, several legislative changes might affect the dynamics of the secondary market for student loans.
Earlier this year, President George W. Bush signed legislation that reauthorized the Higher Education Act, which altered the PLUS program under the FFELP suite of products. Previously limited to undergraduates, the changes became open to graduate and professional students this month.
Further, market professionals expect a slight increase in prepayment speeds from the sector this year. President Bush recently signed the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror and Hurricane Recovery Efforts. This featured a provision that allows borrowers with several loans to consolidate them with any lender they choose, a change from a rule that allowed borrowers to only consolidate with the same lender that provided the loans.
"Based on the repeal of the single-holder rule, Fitch expects prepayments to increase for Stafford and PLUS loans as borrowers will be afforded more options to consolidate," wrote Andrea Murad, a director at Fitch Ratings.
Also, the Deficit Reduction Act featured an increase in loan limits for Stafford borrowers for loans originated after July 1, 2007. It now grants graduate students access to the PLUS loan. They can borrow funds to cover the cost of education, minus aid. In another major change, the borrower interest rate on new loans changed from a variable rate based on the 90-day T-bill plus a margin to a fixed rate of 6.8%, and 8.5% for Stafford and PLUS loans, respectively.
Aside from increasing deal production, market professionals expect FFELP loans to secure extendible notes in single-seller asset-backed commercial paper programs later this year. Student loans are ready fodder for securitization, and utilize swaps for warehouse vehicles that are similar to mortgage warehouse programs, say market sources, so the techniques are in place to complete such a deal. (ASR 07/17/06)
Known for its relatively clean credit history, the student loan ABS area has maintained that record for 2006. Since the student loan ABS business got off the ground in the 1980s, wrote S&P, there have been no downgrades of student loan ABS bonds for negative collateral performance reasons. All downgrades have resulted from downgrades of credit or liquidity support providers. Although default rates are relatively high in the federal loan pools, because of few underwriting thresholds for approved borrowers, those rates have been relatively stable from year to year, with only occasional variance stemming from lower default rates. In most cases, later year vintages have been showing a decreasing default trend.
"These improvements can be traced to increased default prevention techniques applied by the servicers and better school selection under the FFELP response to increased competition from the Direct Loan Program," S& P said.
Competition between FFELP and the Direct Loan Program products has spurred improvements to the FFELP industry. More aggressive servicing procedures have kept defaults in check. While federal default rates have come down over the past decade, alternative loan performance has improved, said the rating agency.
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