MBA lender seeks to securitise student debt

SoFi, the private student lender, expects to begin securitising its loans this year after securing a $60m credit line from Morgan Stanley in the latest sign of growing investor interest in the US student debt market.

The warehouse line of credit extended by Morgan Stanley “will allow us to originate more loans faster”, said Mike Cagney, SoFi chief executive. “It’s a first step towards a broader securitisation programme.”

The San Francisco-based start-up offers loans to students and graduates at 78 top-tier public and private universities, funded by alumni who contribute money to school-specific pools.

It has issued $90m in loans since launching nearly a year ago and is targeting $1bn by the end of 2013. The credit line will help SoFi meet this goal, Mr Cagney said, and move it closer to issuing a rated security later this year.

Warehouse lines of credit, often used in the mortgage business, are used by lenders to originate loans, which they securitise and then use the proceeds of the sale to investors to repay the warehouse lender.

Issuing such securities would allow SoFi to tap into a rising tide of investors who, seeking higher yields in an environment of super-low interest rates, have been snapping up student loans and other asset-backed securities.

Securitisation of a range of assets has picked back up in recent years after falling precipitously in 2008. Total ABS issuance rose to $200bn in 2012 from around $120bn in 2011, according to the Securities Industry and Financial Markets Association, but was still well below the peak of around $750bn in 2005 and 2006.

“Over the past 12 to 18 months, what you’ve seen in the student loan asset-backed securities sector is more traditional fixed income players starting to enter the marketplace.,” said Preston Blankenship, vice-president of trading at SecondMarket, the private trading platform that earlier this month launched a service allowing issuers to sell student loans securities directly to investors.

Figures from RBS show yields on triple A three-year bonds backed by private student loans are about 1.4 per cent compared with 0.8 per cent for government-backed student loan bonds and 0.7 for securities backed by auto loans.

For years, student loan ABS issuance has been dominated by an older type of federally-guaranteed loan that stopped being issued in mid-2010. It is the smaller market in new private loans where investor interest is now focused, and which has seen recent momentum.

In February, Sallie Mae, the largest US private student lender and biggest issuer of student debt-backed ABS, sold $1.1bn of securities backed by student loans. SecondMarket expects $25bn to $30bn of new student loan securities to be issued this year, Mr Blankenship said.

That growth will probably come from private lenders. While government loans account for the vast majority of the nearly $1tn US student debt market, new federal loans are not securitised and have little to no underwriting, making them unavailable to investors and meaning they do not differentiate between default risks of different borrowers.

This is where Mr Cagney sees an opportunity for SoFi to shake up the student loan business with a model that emphasises the connection between alumni investors and borrowers.

“To borrow a page from microfinance, we’re creating a lender that’s engaged not just because of economics but because of affinity,” said Mr Cagney.