Sallie Packaging Loads of Consolidation Debt

A push by Sallie Mae to unload a pile of debt-consolidation credits is breathing life into the moribund market for securities backed by student loans.

The initiative has already led to one consolidation-loan securitization, a $2.2 billion issue that Sallie priced April 3 via bookrunners Barclays, Deutsche Bank and J.P. Morgan (see Initial Pricings on Page 10). That left the Reston, Va., with some $3.8 billion of consolidation credits that it still wants to shed, possibly through a series of securitizations that could price in the coming weeks.

Sallie's securitization plans are driven by a need to find new sources of funding for various assets as it works to unwind a $24.7 billion commercial-paper conduit facility it had been using for nearly two years. "Securitization is really the best way and about the only way," said an equity analyst, referring to plans for consolidation loans held by the conduit line. "Sallie can finally rip off the Band-Aid and get rid of this stuff."

Sallie also plans to funnel loans into the U.S. Department of Education's Straight A-Funding "super conduit," which is slated to go live any day now. That entity is expected to fund $40 billion of student loans, but only government-guaranteed credits written from Oct. 1, 2003, through June 30, 2009, are eligible.

Consolidation credits don't make the cut - hence the need to find a long-term funding solution for those loans. Once the super conduit is up and running, Sallie intends to stop using its own conduit facility to fund qualifying loans.

Sallie isn't the only lender employing such a strategy. Nelnet, another originator of education credits, stepped into the sleepy asset-backed bond market two weeks ago, privately placing a $294 million issue backed by consolidation loans. The Lincoln, Neb., outfit used the proceeds from the securitization plus $10 million of its own money to buy $305 million of consolidation loans that were previously being funded through a warehouse line.

The sale allowed Nelnet to free up some $100 million of cash it was using to service the credit line, and fits in with apparent plans to do away with the facility while using Straight-A to fund eligible loans.

Consolidation-loan issues don't qualify for use in the Federal Reserve's Term Asset-Backed Securities Loan Facility. That's because the loans typically carry maturities of 20-25 years, which makes it impossible to package them into bonds matching the 3-year maturity of TALF loans. Sallie's issue, for example, has a weighted average life of about eight years.

Consolidated student loans fell out of favor a little over a year ago, when changes brought on by the College Cost Reduction Act began forcing lenders to pay additional fees to originate the credits. The act also eliminated incentives for many borrowers to consolidate their education debts. The upshot was a sharp decline in student-loan securitizations, as consolidation loans accounted for much of the collateral for such deals in the market's heyday.

In 2006, Sallie completed asset-backed bond offerings totaling $33.7 billion, of which more than 90% was backed by consolidation loans. By 2007, those credits represented just 60% of its $26.8 billion of total securitization volume.

Meanwhile, Sallie priced a repackaging of outstanding asset-backed bonds on April 8 via lead underwriters Bank of America, Deutsche and RBS Greenwich. The $1 billion transaction is backed by so-called reset-rate notes from three issues the company completed in 2003.

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