WASHINGTON: Companies selling bonds backed by student debt have pulled out of the market this year, as promises of loan forgiveness and higher rates deterred borrowers from refinancing their loans.
The more than two-year freeze on federal student loan repayments — which was extended again in April, bringing relief to many borrowers — and the Biden administration’s plan to formalize its long-awaited student loan relief package has impacted the private lending market this year. , effectively decreasing it.
Student borrowers are hesitant to refinance their federal debt with private loans as long as the promise of forgiveness hangs over their heads.
They have either kept their federal loans or even paid off the private debt they owe after receiving money from Covid-era government stimulus checks.
“It really doesn’t make sense for a federal borrower to refinance to a private student loan now,” said Theresa O’Neill, ABS strategist at BofA Securities.
As a result, the companies that supply that debt and then repackage it and resell it as bonds in the asset-backed securities market haven’t had much work to do this year.
Sales of student debt-backed bonds fell to less than a third of their level from the same period last year, according to data from Bloomberg.
Firms have only sold US$5.2 billion (RM23 billion) worth of student loan asset-backed securities (ABS) in 2022 so far, compared to US$16.8 billion (RM23 billion). billion RM) of emissions at this stage of 2021.
“Because of the payment moratorium and the potential discount, it affects the refinancing space because there is not a lot of refi volume,” said Amy Sze, head of ABS research at JPMorgan, during a telephone interview.
“Now that the payment moratorium has been extended, and may be extended again, borrowers are less likely to refinance their loans.”
Higher interest rates — 4.99% on undergraduate loans for the 2022-2023 school year, up from 3.73% last year — plus wider transaction spreads aren’t helping neither do issuers, as they have helped drive up borrowing costs in the ABS market.
In May, student loan manager Navient Corp paid a coupon of 4.16% on the largest tranche of a $714.6 million (RM3.16 billion) deal, after paying 1. 58% on the same tranche of a similar deal six months earlier in November.
Only Sallie Mae Bank and Navient have staged more than one offering each since January as fewer borrowers see an incentive to consolidate their federal debt in the private market.
Sluggish bond sales have led some banks to cut their student loan issuance forecasts by at least half.
Bank of America revised its forecast to US$10 billion (RM44 billion) from US$20 billion (RM88.5 billion) in a note to investors in early June, while JPMorgan did the same in a note of June 24.
“The ongoing federal moratoriums on student loan payments, the streamlining of income-based forgiveness and repayment programs, in addition to rate hikes, are all headwinds for private student loans,” wrote the JPMorgan analysts.
“We now forecast $10 billion in gross ABS issuance in the private student loan ABS sector, compared to our previous forecast of $20 billion in November 2021.”
With fewer offers, buyers scoop up the tickets or look elsewhere for value.
According to BofA Securities, ratings have widened by 90 basis points (bps) since the start of the year, an attractive recovery compared to other asset classes such as credit card ABS, which have widened by 26 bps.
But this spread is not enough for some structured investors looking for better returns.
“You can get better spreads in other asset classes like subprime auto ABS,” Tracy Chen, portfolio manager at Brandywine Global Investment Management, said in an interview. “The pandemic hasn’t affected those bonds too much, whereas it has impacted other products like autos where you get very favorable recovery rates.”
The fact that Covid-related forbearance is weighing on student loans and there hasn’t been much generated is also a downside, Chen said. —Bloomberg