Things look good in the student-loan sector of the ABS market following the recent passage of a bill that fixed lending rates, preventing a plan that was meant to reduce private education lending. There have also been two first-time issuers looking to tap the primary market. The lack of new-issue supply is nothing to worry about, sources note, as conditions currently favor the holding of student loans on books, but it should pick up later this year, following the resetting of rates in July.
Initially passed by the U.S. Senate Dec. 20, the House of Representatives finally passed S. 1762, more commonly known as the student loan interest rate fix. S. 1762 reverses the Education Reform Act of 1993, President Clinton's initiative to move the lending activity from private banks into the hands of the government-sponsored Direct Loan Program.
This passage, widely expected to be signed into law by President Bush, will effectively fix student loan interest rates at 6.80% from July 2006 on. Currently the rates offered to borrowers are variable, and have capped at 8.25%. This greatly boosts the Federal Family Education Loan Program, which currently serves 80% of schools in the U.S.
For the private lending community this bill will ensure that the special allowance payments (SAP), or basis risk subsidy, will continue to be indexed to the 90-day commercial paper rate, better matching lenders liabilities.
"This is another victory for FFELP providers," said Robert Franciscus, Director in Fitch's asset-backed group. "And in reality the personal service provided by FFELP lenders is much better than that of the Direct Loan Program."
In addition to the previously reported plans to tap the market with an inaugural offering from Connecticut-based Student Loan Corp., a unit of Citibank, expect Aberdeen, S.D.-based Education Loans Inc., known as EdLinc, planned to tap the term markets for the first time in 2002.
The company, which boosted its shelf registration Jan. 23, plans to sell up to $500 million of public, term ABS this year, according to a company source. The first and more sizeable of two planned offerings is expected to hit sometime in the second quarter, the source added. The issuer plans to bring the deals via Salomon Smith Barney, with which it has a strong funding relationship in the past.
So far in 2002, there have yet to be any public term offerings in the market; primarily due to the Treasury-to-EuroDollar (TED) spreads, which are currently "right on top of each other," according to a source.
Also helping the sector is the increasing amount of loans indexed to 90-day commercial paper rather than three-month T-Bills, numerous sources pointed out. "As we get more CP (indexed loans) there is less basis risk in securitizations," said Fitch's Franciscus. He noted the most recent Sallie Mae transaction - the first to be backed entirely by C.P.-indexed loans - as the future of the primary market.
Because of the current sector slowdown however, most analysts predict a slight decrease in supply, with a panel of eight analysts forecasting just $11.7 billion on average for 2002, versus the $13.3 billion that priced last year.