A couple more loan securisations under the Federal Family Education Loan Programme (FFELP) are likely to still squeeze in as student loan issuers look to restructure existing transactions. The governmentrun programme was eliminated the 1st of July.
"We saw a couple of new FFELP securitisations because a lot of issuers want to clean up FFELP loans on their books," says Jingjing Dang, analyst at Moody's, noting that she does not expect the volume of FFELP loan securitisations to continue like this.
According to one MBS investor, a few more securitisations are likely to occur. Last month, the market absorbed FFELP securitisations from Student Loan Corp; Goal Capital, which issued a US$118m deal
called GOAL 2010-1; and Educational Funding of the South, which issued a US$228m EFSV 2010-1 offering. An Access deal totaling US$464m featured private student loans. NextStudent's liquidation tomorrow highlights the troubles that the FFELP student loan market has had during the credit crisis. Citigroup is conducting the public auction of NextStudent Master Trust I's collateral to repay outstanding notes (see SCI 20 July 2010).
"This is very unusual. We have not seen public auctions of collateral. We saw limited auctioning off of some collateral pools sold in parts but not like this," says Irina Faynzilberg, vice president and senior credit officer at Moody's. NextStudent's Trust was securitised entirely with auction rate securities—a market which has slowed
considerably in the credit crisis. "Starting from the beginning of 2008, the auction rate market did not function anymore," says Dang.
"There was no clear bid so all the auction rate securities were paid at the failed auction rate."
The Trust is compensating noteholders with a very high coupon, which is eroding to the Trust collateral.
"The interest collection on the loan side is not enough to offset the high coupon payments on the liability side so we see a consistent decline in parity levels," she adds.
The NextStudent Trust in question recently traded at the high 80s to 90s dollar price range, which rose over the past year. Holders of those notes today are looking for a higher dollar price than the minimum 93 dollar price set for the auction, says one market participant. Senior noteholders could have up to a 7% loss on the principal since the minimum sale price is 93% of the senior note principal balance. But if the actual expenses in the auction process turn out to be higher tomorrow, the senior noteholders can take more than a 7% loss, however.
The subordinate holders, which are largely held by the dealer community, will have a "complete wipeout," adds the market participant. However, the liquidation of NextStudent is not an immediate indication that there will be other collateral
pools up for auction.
"The circumstances surrounding that particular trust is very different than the other issuers with ARS outstanding," says Kevin O'Connor, managing director and co-head of auction rate securities at SecondMarket. Auction rate securities at least in the secondary market are still seeing some action.
"There is still plenty of trading. It's just a matter of varying from one issuer to another issuer and one trust to another trust. It boils down to a perceived duration of that paper," says O'Connor.
Student loan lenders were traditionally issuers of ARS through the use of Dutch Auctions. The interest rates on the securities now continue to reset but they are reset through the failed auction, which is done by a formula, says O'Connor.
