S&P: Record Issuance For U.S. Student-Loan ABS Amid Growth of Consolidation-Loan Industry

NEW YORK (Standard & Poor’s) March 31, 2003 - Student loan securitization set a record in 2002, driven by increased issuance from established issuers (primarily Sallie Mae) and new entrants to the market, according to a comprehensive commentary on the student loan-backed ABS sector released recently by Standard & Poor’s Ratings Services. Moreover, the student loan market is expected to continue its pattern of strong growth in 2003, bolstered by long-term demographic trends and a broadened investor base for these securities.

Over the course of 2002, Standard & Poor’s rated $27.2 billion of student loan ABS (both public and private), up sharply from $11.4 billion in the prior year, the report notes. Among the significant developments during the year were record consolidation loan-backed issuance, an increase in issuance by Sallie Mae to nearly $14 billion, and total loan origination of more than $37 billion. Moreover, with the costs of attending college rising steadily, the outlook for student-loan ABS over 2003 is continued issuance growth, the commentary says.

The article, titled “Student Loan ABS Volume Sets Record in 2002”, points out that interest rates, which dropped to record low levels in 2002, have helped to boost consolidation-loan volume, which in turn has provided a market opportunity for new emerging business platforms; i.e., the consolidation loan marketing company. Several of these new consolidation marketing companies have securitized 100% consolidation loan portfolios in the private term ABS market. During 2002 new consolidation loan issuers included College Loan Corp., Student Loan Consolidation Center, Collegiate Funding Services, and U.S. Education Loan Trust. In addition to these new companies that securitized all consolidation loans, several existing issuers brought pure consolidation loan deals to market, including Sallie Mae and Student Loan Corp. (Citibank).

“Given the large amount of consolidation loan activity, one of the key questions in rating these transactions will be the credit performance of these consolidation loans,” said Christopher Conroy, a Director in Standard & Poor’s Structured Finance group and author of the article. “And given the large amount of competition in this sector, Standard & Poor’s is concerned there will be higher default rates than has been indicated in the historical data. Another concern is the longer term of these loans (30 years), which means that the borrower is subject to more economic cycles. Mitigating factors are the lower monthly payment, willingness to pay, and the fact that an estimated 25% of defaults are caused by not graduating (which would not be a risk in consolidation loans.”

According to the article, student loan asset-backed deals, previously viewed as one-time transactions, are now seen as a more stable sector of the market, comparable to more traditional sectors such as credit card offerings. The size and frequency of the deals have provided additional comfort to investors, with the short-term floating-rate tranches particularly attractive to European investors. Further, because these securities are backed with a government guarantee, investors perceive low credit risk with these offerings.

Other trends mentioned in the article include issuers’ reduced reliance on the auction-rate market and their tapping of the LIBOR note market, the use of planned amortization class (PAC) technology to address the increase in prepayment risk due to more consolidation loan activity, and the increased securitization of alternative loans, which are not connected with the federal government. “These (alternative loans) are unsecured consumer loans, so lenders are likely to use stricter criteria when assessing borrowers’ creditworthiness,” said Mr. Conroy.

The article “Student Loan ABS Volume Sets Record in 2002 is available on RatingsDirect, Standard & Poor’s Web-based credit analysis system. The article is also available on Standard & Poor’s Web site at http://www.standardandpoors.com. Go to "Fixed Income," under “Browse by Sector” choose “Structured Finance”, and under Commentary & News click on “More” and scroll down to the desired article, dated March 24.