Nelnet tries to stave off student loan ABS downgrades

NEW YORK (IFR) - Student loan servicer Nelnet is trying to stave off downgrades on US$3.25bn of its debt, and wants investors to help by agreeing to extend the maturity date of its bonds.

The notes are at risk of being downgraded by Moody’s, which this week announced sweeping changes to its method of rating bonds backed by loans from the Federal Family Education Loan Program.

Nelnet said it wanted consent to extend the maturity dates on its six most recent series of bonds, all underpinned by FFELP loans.

Bonds backed by student loans have come under pressure with the advent of programs to ease the student debt burden - in some cases meaning borrowers make no monthly payments.

That has raised the possibility of a technical default on the bonds because they would not be repaid in time, even though the debt is guaranteed by the US government.

Greer McCurley, Nelnet executive head of capital markets, said his company was encouraged by fellow issuer Navient, which secured the required 100% consent from bondholders to extend maturities on some of its FFELP bonds.

“Until we saw the success of Navient, we didn’t think it was achievable,” he told IFR. “I wish we would have done this three or four months ago.”

Both Navient and Nelnet turned to DealVector, an online identity-protected network that allows investors to find other holders of their bonds, and issuers to communicate directly with many bondholders at once.

Nelnet’s bond terms also require 100% consent for maturity extension. But that is tricky to achieve, especially when the bonds are liquid and trade actively, making it hard to locate all their holders.

DealVector CEO Mike Manning said his company had contacted six other issuers about a similar effort but had received a tepid response thus far.

“There’s a separation between the number one and number two issuers - those who have been very proactive about it and others who are waiting,” he said.

Issuers with no plans to sell more FFELP-backed bonds have less incentive to avoid downgrades, Manning said.

Even though FFELP was discontinued - its last loans were issued in 2010 - Navient is still an active issuer, having priced a US$761m FFELP-backed bond last week.

Nelnet’s last deal was in May 2015 but it hopes to be back in the market later this year, said McCurley.

It is not immediately known when any downgrades might be implemented, but Moody’s said it was putting more than 400 tranches of FFELP bonds on review for downgrade.

Deutsche Bank analysts said the downgrades may not come until the fourth quarter.

“It might take months for them to work through the various cash flow scenarios and ultimately decide on ratings,” they said in a report.

“This could potentially give sponsors more time to support their transactions via additional loan repurchases or working with investors to amend and extend legal final maturities for watch-listed bonds.”