The U.K. government said last week that it is looking into the possibility of selling part of its GBP16 billion ($31.3 billion) student loan book to the private sector. Although nowhere near the volumes of the U.S. student loan market, this considerable amount could pave the way to establishing a noteworthy U.K. securitization market.
According to Deutsche Bank research, the U.K. government sold GBP4.1 billion of student loans to the private sector in the late 1990s, which was the last time that it did, and some of these loans ended up in securitizations. So far, the market has seen only two securitizations backed by U.K. student loans via the Thesis and Honours deals. In both these deals, the government's role was limited to providing the first loss protection and cash flow related to the subsidy package.
Last November, the Honours transaction was refinanced with the issuance of Honours Series 2 to rebalance the deal capital structure and take advantage of the better than expected performance of the assets. "The deal being discussed [presently], as I understand it, is for the government to sell the book, which would then be securitized by the purchaser," said Michael Cox, property, corporate and infrastructure securitization analyst at the Royal Bank of Scotland. "At present, the loans are advanced by the government at subsidized rates."
Tim Travers, CEO of FGIC U.K. said that the development of a U.K. student loan ABS market would provide a natural fit for monolines. "We like student loans and believe it would be great to find a way to help the government-controlled entity here," he said. "However, given the differences between the U.S. and the U.K., we don't believe the U.K. [market] will be that big."
Douglas Renfield-Miller, chairman & CEO at Ambac Assurance U.K., said that they have looked at this sector in the past. "They are not well suited to securitization due to their unusual payment features, e.g. principal payments only commence once the borrower has graduated and reaches a specified earnings threshold," he explained. "That said, we're willing to take another look if there's a deal to be done."
Deutsche analysts estimated that if a fair amount of the book ends up being funded through securitization, the market could potentially see around GBP10 billion of U.K. student loan deals over the next two years. "Such volumes pale in comparison to the U.S. market, where primary deal flow has exceeded $60 billion annually over the past two years, with some $184 billion of student loan ABS currently outstanding," Deutsche analysts said in a report. "Student loans typically comprise about 5% of the entire U.S. ABS market."
A smaller U.K. population is the main reason for the difference between the two markets' sizes. Tuition costs are also significantly lower in the U.K. U.S. tuition costs run about $10,000 to $15,000 per year for public universities and $20,000 to $30,000 per year for private universities, according to Travers. By contrast, tuition in the U.K averages GBP3,000 per year. However, recent headlines indicate that costs may be rising for U.K. students, which could provide more fodder for growth in U.K. student loan volume.
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