NEW YORK - As far as growth in emerging asset classes is concerned, extendible notes in ABCP programs and student loan-backed ABS have both come a long way recently. Now their paths are converging.
This year, asset-backed commercial paper conduit sponsors are expected to launch vehicles that will issue extendible notes backed by loans issued under the Federal Family Education Loan Program (FFELP), according to industry professionals who spoke at Fitch Ratings' annual ABCP Conference held here last week. After the event, several market sources said that a couple of single-seller extendible note ABCP programs were being structured, but that none were in the market yet.
"There is a lot of potential for extendible note programs," said Jean-Luc Sinniger, a director of money markets at Citigroup Global Markets during the conference. There was $117 billion in extendible note ABCP programs by the end of the first quarter, according to numbers from Citigroup, JPMorgan Securities and Fitch Ratings. That compares to $123 billion in outstanding extendible notes for all of 2005. Judging by the growth of the student loan ABS market, investors are ready to absorb ABCP extendible notes backed by student loans, according to several sources. Student loan ABS issuance has grown from $44.7 billion in 2004, to $63.2 billion in 2005. By June 30, 2006, the sector issued $40.4 billion in student loan-backed paper, up about 36% from the same period the year before, according to The Bond Market Association and the American Securitization Forum.
In most cases, administrators choose very liquid assets that amortize rapidly, or can be sold quickly to pay of the maturing notes to collateralize extendible notes. Although student loans do not amortize quickly, they can be readily securitized to generate proceeds to pay off the extendible notes, said Everett Rutan, a senior vice president in the ABCP group at Moody's Investor's Service. The thinking is that if a program administrator had a six-month extension period on a note, it should be easy enough to sell or securitize several billion of dollars' worth of government guaranteed student loans. Estimating the proceeds might be slightly tricky, depending on how high a level of funding the sponsor is looking for, but still feasible, said Rutan.
Similar to mortgages, there is a "very deep, active and robust secondary market for that type of collateral," said Michael Dean, a managing director in the ABCP group for Fitch Ratings. One reason, according to other market sources, is that some of the FFELP programs are federally subsidized. Also, the swaps negotiated for student loan warehouse vehicles are similar to mortgage warehouse programs. This offers a ready template against which program sponsors can structure future transactions, according to some ABCP professionals.
"The assets in both cases are long-lived and are actively securitized," Rutan said. "A firm that's gotten comfortable writing a market value swap for a mortgage warehouse program could probably get comfortable writing a market value swap for a student loan warehouse problem."
Fitch Ratings' one-day conference, held at the Museum of Television & Radio in Manhattan on Monday, drew more than 180 participants.
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