Case Study: UK student loans

  • 01 Jun 1998
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STUDENT LOANS, LONG A FAMILIAR ASSET class in the US, first emerged in the UK in March this year, when Greenwich NatWest securitised £1.03bn of the assets. Bringing new asset classes to the markets is rarely easy, but structuring the first student loans deal was more complex than most.
Not only were student loans a relatively unseasoned class of lending - they had only been advanced since 1990, and most loans were originated much more recently than that - but many of the loans had yet to begin repaying.
Having won the mandate to purchase the first tranche of loans after a 12 month contest organised by NM Rothschild, Greenwich NatWest launched the packaging via special purpose vehicle The Higher Education Securitised Investment Series no 1 plc (Thesis 1).
The underlying loans are extended to students by the Student Loan Company, with repayments beginning the year after graduation. That repayment schedule lasts up to seven years, but can in fact be deferred indefinitely if the graduate earns less than 85% of the average wage.
Interest accrues to the principal sum at the rate of RPI during any deferral period; the government adds the difference between RPI and Libor plus a spread, to make the portfolio commercially viable.
Modelling the way in which RPI could impact the portfolio, was one the keys that unlocked the deal's economics, according to Steve Skerrett, a director in the asset securitisation group at Greenwich NatWest.
Still more sensitive was analysing the likely timing and amounts of the repayments from the borrowers.
With historical data seemingly limited - particularly as many of the loans had yet to start repaying, asset backed bankers said modelling the cashflows was unusually difficult.
That did not deter Greenwich NatWest, which added two full time analysts for the last three months before the transaction was sold, to the one it already had working around the clock.
"What we found was that when we obtained the information we got to a better understanding of the loans than we thought we could," said Greenwich NatWest's Skerrett. "We had six million data points to work with."
Using those points - the moments at which borrowers moved into repayment, deferral or even default, allowed Greenwich Natwest and the rating agencies to unearth strong and consistent patterns of payment, adding robustness to the forecast of credit performance and average life.
Tranches 'A1' and 'A3' suck in the early cashflow and so pay down first; the bulk of the amortisation risk is borne by the 'A2', 'A4' and 'B2' tranches.
The deferred interest portion of the package is financed through Greenwich NatWest's Thames Asset Global Securitisation (TAGS) vehicle, which as a CP-financed multi-seller conduit, has the flexibility to cope with variations in the amount of interest deferred.
Steve Jones, head of syndicate at Greenwich NatWest, said the bonds were sold into Europe and the US 144A market, as well as the UK.
Thesis is unlikely to be the last securitisation of student loans in the UK - a second tranche is due to be auctioned shortly - but future supply does contain an element of uncertainty.
Although the new Labour government approved of student loans sales approved by the previous regime, it remains unclear whether the new system of student finance to be put into place will prove amenable to securitisation.

  • 01 Jun 1998

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 29,333.03 101 7.94%
2 JPMorgan 27,208.83 91 7.37%
3 Barclays 23,714.00 55 6.42%
4 Bank of America Merrill Lynch 20,332.10 65 5.50%
5 Goldman Sachs 20,005.21 49 5.42%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Mizuho 299.85 1 21.73%
1 ING 299.85 1 21.73%
1 Commerzbank Group 299.85 1 21.73%
1 BNP Paribas 299.85 1 21.73%
5 UBS 60.22 1 4.36%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 Goldman Sachs 1,607.28 5 23.24%
2 Credit Suisse 1,301.65 4 18.82%
3 UBS 970.80 3 14.04%
4 BNP Paribas 522.35 4 7.55%
5 SG Corporate & Investment Banking 444.17 3 6.42%