Student loan bonds worth $6bn listed on ISE

Almost $6 billion (€4.24 billion) in bonds backed by American student loans have been listed on the Irish Stock Exchange (ISE) within the past month amid signs that the troubled US consumer credit market is coming back to life.

Late last week, one of the largest American student loan packagers, the College Loan Corporation, unveiled plans to list a series of loans worth a total of $3 billion on the ISE. This came shortly after the successful placement of $2.86 billion worth of the bonds by a competitor, First Marblehead, earlier this month.

The size of the two most recent offerings has surprised US credit analysts, who had predicted that First Marblehead would be forced to offer an issue of less than half the size in an environment where few ready buyers have been in evidence.

The company took the unusual step of purchasing default insurance on the majority of loans represented by the bonds, a move which reduced its own profits on the sale but would, it was hoped, make the debt more palatable to risk-averse buyers.

That insurance, rarely applied to even the riskiest consumer loan-backed bonds over the past five years, was combined with a multitranche structure which protects investors in the safest classes of bond from the majority of defaults.

College Loan Corporation, which has listed more than $12.1 billion of student loan-backed bonds on the ISE since 2002, is betting that bond buyers are now ready to accept fewer guarantees and will attempt to sell uninsured bonds in its offering, although it will also use the multitranche structure with higher rates for the riskiest bonds.

Working with lenders and American universities, student loan packaging companies offer to arrange private tuition loans for students who have exhausted or are ineligible for government-guaranteed loans.

The interest and principal payments on these loans are then pledged as collateral for a type of bond known as an asset-backed security, which can be sold to investors such as bond and pension funds.

The packaging companies collect fees from the lending banks with whom it arranges the loans and earns further revenues when the bonds are sold.