The student-loan sector has had quite a showing this year, with issuance already nearing 40% of total 1999 volume, according to the research group at Banc of America Securities. But is this the tide of a take-off sector, or merely run-off from deals held back last year?
It's a combination of the two, said Cheryl Watson, senior vice president and chief financial officer at USA Group Secondary Market Services. Watson sees student loan volume hitting $20 billion this year, nearly doubling last year's proceeds.
"We did not issue the third and fourth quarter of 1999, just because of the market, even though in the end the market seemed to get better and better," Watson said. "Our belief was that it couldn't be worse in the first quarter, it could only be better, and fortunately it paid off for us."
"You're going to see a lot more [student-loan] issuance this year," said Claire Mezzanotte, senior director at Fitch IBCA.
One reason for the increased issuance is the change in the special allowance index from the 91-day Treasury bill to the 90-day commercial paper index, which will bring more players into the market.
"There will be less basis risk for financing these transactions," Watson explained. "We may see large originators either holding onto their paper or securitizing themselves."
Watson speculates that there could be some re-emergence of players who were in the market historically, when it was more economic to issue securities based on Treasury bills.
Also contributing to the increased issuance is the emergence of private or alternative loans, which are loans not backed by the Federal Family Education Loan Program (FFELP), and have, in small concentrations, been included in several transactions over the past year or so.
"They're starting to become more prevalent in securitization," said Andrea Murad, an associate director at Fitch.
"Since it's new to the market, and they're not government guaranteed, it's very rare that people do deals where it's 100% private."
"I think that alternative loans are the way to go because there are a lot of people out there who are tired of all the government forms you have to fill out," said Murray Watson, the chief executive officer and president of Brazos Higher Education Service Corp.
"A lot people in the public school K-12 area are going to start sending their kids to private school," continued Watson. "There's going to be a big unmet need out there. They've got to get financing somewhere."
Watson said that in some cases parents are financing their children's private K-12 education on credit cards.
"Plastic has made it so easy," he explained. "I think once they start doing the apples versus apples comparison, alternative loans will be a viable alternative."
However, this sort of momentum behind alternative lending could level off, as regulatory actions have made it more expensive to finance those loans in the capital markets.
In what should ultimately benefit most lenders, the regulators have officiated a 20% risk weight on the triple-A pieces of transactions which are backed solely by FFELP loans. However, as of yet, only the deals from issuers who have received a special letter from the regulators are subject to this risk weighting.
"Quite frankly virtually all U.S. investors were already viewing student loan securitizations as a 20% risk weight, those that included FFELP loans," said SMS's Cheryl Watson. SMS and Sallie Mae are currently the only issuers who have received the letter guaranteeing the risk weight.
"The letters haven't necessarily helped everyone," Watson continued. "It helped those who got the letters, but I think it harmed those who didn't get the letters... the regulatory bodies unfortunately wouldn't just say that that letter is valid for all FFELP securitizations, but that we would actually have to go seek a letter on our behalf, which we did."
One of the major impacts is that alternative loans cannot be sold against this 20% risk weight, which will negatively affect the pricing. Subsequently, issuers who were issuing mixed pools are likely to issue all FFELP or all alternative deals.
For SMS, the result is that the company will sell its private loans into conduits, as opposed to tagging them onto the FFELP deals, said Watson.
Though SMS and Sallie Mae are the only two issuers whose deals are eligible for the 20% risk weight, all FFELP issuers should be able to receive similar letters, said Mezzanotte and Murad.