More than half of the floating-rate notes sold this year have been from state-run student loan securitization pools, nearly all with Libor as the reference rate and most underwritten by Bank of America Merrill Lynch.
Bank of America’s dominance of student loan floating-rate deals this year has made it the premier FRN underwriter in 2010, with a 41.8% market share, according to Thomson Reuters.
Student loan pools make an interesting natural seller of floating-rate notes. These pools need cash flows that correspond with those generated by student loans, which generally reset according to short-term benchmark rates. London Interbank Offered Rate-based floaters are a logical fit.
The biggest seller of municipal FRNs by a healthy margin this year is the Missouri Higher Education Loan Authority, or MOHELA, which brought two deals in 2010 worth a combined $1.32 billion.
The student loan securitizations all work mostly the same way. They assemble a pool of student loans issued under programs like the Federal Family Education Loan Program. They sell floating-rate notes, the payments on which are generated by the payments from the loans in the pools, essentially funneling the student loan payments to bondholders.
The reason the securitized deals need floating rates is the student loans are themselves floating rate. The collateral on MOHELA’s two deals are loan pools with a combined $1.34 billion of student loans, of which 96% reset based on the three-month commercial paper rate and 4% reset based on the three-month Treasury rate.
MOHELA’s two deals yield three-month Libor plus 85 basis points.
The idea is that if the rates paid on the student loans go down because of a decline in the commercial paper or Treasury bill rate, the payments promised on the FRNs will go down, too, because that would presumably be accompanied by a decline in Libor.
MOHELA, the Oklahoma Student Loan Authority, the Kentucky Higher Education Student Loan Corp., the Access to Loans for Learning Student Loan Corp., and the New Mexico Education Assistance Foundation have all sold this kind of debt.
The securitization process enables these not-for-profit organizations to amass a pool of student loans, sell the rights to the pool to bondholders, and use the proceeds to amass a new pool. And so on, liquefying the market for student debt.