UK is offering a Brexit bet with student loan ABS

The long awaited student loan securitization from the UK Department for Education might be the closest structured finance investors get to being able to bet on the economic effects of the country's exit from the European Union.

  • By Sam Kerr
  • 28 Nov 2017
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The deal is backed by a pool of income-contingent student loans made between 2002 and 2006. The borrowers are mainly in their thirties and figures point to a deal with a little more hair on it than many ABS investors are used to.

While 49.9% of the borrower pool are paying back their student loans from every pay packet through the Pay As You Earn taxation system, the typical repayment method in the UK where tax is deducted automatically, 42.9% of borrowers make no repayments because their earnings are below the minimum threshold.

The repayment earnings threshold in the 2015-2016 collections period was £17,335, while the mean average earnings of this borrower pool was £17,250.

Plenty of the borrowers therefore do not have to repay anything. S&P predicts a loss rate of between 40%-50% and a full repayment rate of 50%-60%.

This is already a transaction of fine margins but it is even more interesting when thinking about the UK economy after Brexit.

While the ‘A1’ notes have a short weighted average life of 2.9 years, the transaction offers two additional higher yielding tranches with weighted average lives of 11.5 and 12.5 years respectively.

If Brexit goes as well as its proponents predict — creating jobs and economic success as the UK becomes a truly global economy — rising wages and more employment opportunities should lift more of the borrowers in the pool above the repayment threshold, contributing to the success of the deal.

But if Brexit causes a downturn and leads to higher unemployment, even fewer graduates will be paying back their loans.

The Organisation for Economic Co-operation and Development (OECD) has issued weak growth estimates for the UK over the next two years, which would place it at the bottom of the G7, growing by 1.2% in 2018 and 1.1% in 2019.

The OECD added in its report that this sluggish pace of growth would be insufficient to prevent a moderate rise in unemployment, which would likely affect the roughly 441,300 borrowers — calculated by dividing the total outstanding balance by average outstanding borrower balance — in the pool, many of whom are in low income professions, according to the presale report for the securitization.

Therefore, the success of the UK's negotiations with the EU will likely directly influence the deal.

The coupons on the transaction will have to be generous, but sources speaking to GlobalCapital over the past month have said that there remains a serious risk that many borrowers in the pool may never pay back their loans.

This is outlined clearly in the S&P report with the potential loss rate.

With the deal’s performance directly linked to the careers of its borrowers, this deal carries a chunk of Brexit risk.

  • By Sam Kerr
  • 28 Nov 2017

GlobalCapital European securitization league table

Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 Bank of America Merrill Lynch (BAML) 7,026 25 11.95
2 Citi 6,449 21 10.96
3 BNP Paribas 5,093 18 8.66
4 Barclays 4,040 11 6.87
5 Lloyds Bank 3,615 14 6.15

Bookrunners of Global Structured Finance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 120,126.76 346 12.85%
2 Bank of America Merrill Lynch 99,988.41 288 10.70%
3 Wells Fargo Securities 88,516.28 265 9.47%
4 JPMorgan 69,113.88 208 7.39%
5 Credit Suisse 51,313.00 155 5.49%