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February 10, 2017  

FFELP Flurry in State Issuers' Forecasts

State-sponsored education lenders are lining up to issue bonds underpinned by government-guaranteed student loans.

State Board of Utah got the ball rolling on Feb. 2, selling $420 million of bonds backed by college loans written under the U.S. Department of Education’s now-unwinding Federal Family Education Loan Program. Still in the queue are FFELP-loan deals from Kentucky Higher Education, Massachusetts Education Financing Authority, Michigan Finance Authority and Pennsylvania Higher Education Authority. All are expected to price deals in the next month or so.

The state lenders are anxious to take advantage of favorable funding costs. Consider that when Utah priced its deal via underwriter RBC Capital, a $402 million class of triple-A-rated notes with four-year lives went out the door at 87 bp over one-month Libor — compared to 95 bp for a similar class in Utah’s previous offering on Oct. 20.

Just since the start of this year, spreads on FFELP bonds with three-year lives have come in by an average of 18-20 bp, while subordinate tranches have tightened by 55-60 bp.

“The bid for FFELP paper hasn’t been this strong in years,” said a consultant who advises lenders on their FFELP-loan portfolios.

Indeed, the expectation is that the state agencies could issue a combined $2 billion of bonds in the coming weeks. The last time there was a flurry of offerings from nonprofit lenders was between September and November of last year, when Utah and Pennsylvania printed $1.4 billion of FFELP paper.

Including securitizations of private student loans, lenders have issued a total of $2.7 billion of education-finance bonds so far this year, compared to $590 million during the same period last year, according to Asset-Backed Alert’s ABS Database. FFELP has been unwinding since 2010, when the Department of Education stopped guaranteeing new accounts for private-sector originators in favor of a direct-lending format.