Denver-based student loan securitizer Union Financial Services is not afraid of big bad Y2K. Instead of a looming threat, Union Financial is looking at the millenium computer bug as an opportunity to sell its student loan bonds at liquid prices. As Union Financial Senior Vice President Ron Page said, a dearth of product could cut a path to attractive spreads.
"If there's an opportunity to sell debt there, we're going to take it," Page said.
In fact, it is the company's goal to wrap up its shelf filing with the SEC by Labor Day, so the firm can pull the trigger in the fourth quarter if investors with cash in their pockets need to fill gaps in their portfolios. That short supply situation coupled with a buyside a bit hungry after finding it difficult to buy a half year's worth of bonds for 1999 in just the third quarter, has Union Financial leaning toward a fourth quarter deal.
"We don't plan to be in the market in the third quarter, unless it's uniquely good," Page said. "There's going to be a lot of volume in the third quarter. We've heard upwards of $4 billion for this sector alone. Everyone seems to think they need to avoid the fourth: so we're looking."
The Importance Of A Good Partner
Union Financial mixes that contrarian attitude with a generally conservative approach. Virtually all the company's student loans are purchased from Union Bank in Lincoln, Neb.
"I guess you could call us a single seller asset-backed securitization program," Page said.
Union Bank both originates its own loans and acquires loans from other lenders from across the U.S. The bank owns a servicing company called Unipac, which services approximately $13 billion in student loans, and acts as Union Financial's primary servicer.
"Union Bank is our primary relationship, and that's our purpose really, to provide liquidity for Union Bank as they originate or acquire loans from other entities."
Page said that the key to his business ultimately lies in the servicing, but agrees that the crucial step in turning debt into capital begins on the customer level. The strategy at Union has been to target the four-year schools.
"Our portfolio has very few trade school loans in it," Page said. "They tend to have a higher default rates and it just doesn't fit our profile. If a loan defaults, it's just like a prepayment for us, and we get a ding on our cash flow. We try to avoid loans with these kinds of characteristics, but if we do buy them, we buy them at a lower price."
The company recently filed an S-3 registration with the SEC for $2 billion in anticipation of an upcoming deal. Longtime Union underwriter PaineWebber will lead manage the upcoming transaction. Page said likely co-managers are Merrill Lynch, J.P. Morgan, and boutique underwriter Dain Rauscher. Salomon Smith Barney, which has also managed Union deals in the past, may play a role as well.
Union Financial makes room in its shelf registration for a variety of structures, such as Treasury bill floaters, Libor floaters, auction rate securities and fixed rate bonds, all of which the company has sold in the past. Page describes Union Financial Services Taxable Student Loan trust as hedged against market volatility because of this structural diversity.
"By using a variety of different debt structures, essentially, our trust has its own hedge built into it," Page said. "So rather than buy hedges, these transactions have accomplished the same purpose."
Page said that in December the company pulled the trigger on $300 million of fixed rate debt to match out the loans at debt floors. As rates climb like they've done lately, those loans will produce a higher return. But Union locked in a bottom line spread on those loans with its fixed rate issue. The point, said Page, is to be ready.
"We can pick which structure works when we get there."
History Of Good Health
Page argues that the history for securitization of student loans goes back much further than one may think. The old-style, tax exempt funding transactions where state agencies were created to use tax exempt bonds to provide liquidity to lenders, which dates back to the 1970s, were asset-backed deals by definition, Page says, though maybe not by name.
"Frankly, those transactions are asset-backed securitizations, but I don't think we ever thought of them that way. At the moment, four out of five dollars created in a securitization are done in the taxable markets; one dollar is created in tax exempt bonds. They continue to provide liquidity."
Page seems happy with the renaissance the student loan sector is currently experiencing.
"The history of this asset class is sound, the transactions that have been done are very secure. I think it's very healthy."