A pool made up of private student loans, entirely, will collateralize the $2.2 billion SMB Private Education Loan Trust, 2022-B.
Salle Mae sponsored the transaction, for which it is also administrator. Sallie Mae Bank underwrote and originated all of the loans under the Smart Option Student Loan Program, which do not benefit from a guarantee from the U.S. government, according to a presale report from Moody’s Investors Service.
Although Smart Option loans lack a government guarantee, they typically are extended to borrowers with higher credit quality, as demonstrated by higher FICO scores and a higher percentage of co-signers. Also, a portion of loans is extended to students who make payments while they are still in school.
Moody’s noted one particular credit strength: the loans have no exposure to any basis risk between prime and Libor, because the loan pool does not contain loans indexed to the prime rate, the rating agency said.
Credit Suisse Securities is the initial note purchaser for the deal, which will repay note holders through a senior-subordinate pro rata structure. Subordinate notes will receive scheduled and unscheduled principal collections after the more senior notes meet their respective target enhancement levels. This arrangement is likely to increase the average life of the senior notes and expose them to additional credit risk.
Moody’s expects to assign ‘Aaa’ ratings to the fixed-rate, class A A-1A notes and the floating-rate class A-1B notes, both of which have a principal amount of $871.9 million.
Moody’s noted that among Environmental, Social and Governance (ESG) risks, social considerations pose the most risk to the transaction. Payment plans and relief programs are on the rise, particularly forbearance, income-contingent payment plans and interest rate reductions, the rating agency noted. These programs increase maturity risk in private student loan ABS.
Further, private student loans such as the ones in the pool are exposed to borrower relationship risks surrounding the disclosure of servicing policies and deceptive or abusive practices. Such disclosures could increase litigation risks against private student loan servicers, the rating agency said.
Borrowers of the loans in the pool have an principal balance of $14,956 and their loans have a weighted average (WA) remaining term of 146 months.
Some 91.9% of Smart Option loans in the SMB 2022-B pool are co-signed, and Moody’s noted a much stronger track record with those types of loans.
Smart Option loans had a 4.0% cumulative default rate of the 2011 repayment vintage, compared with a 5.8% cumulative default rate of Signature loans from the same vintage.