EMEA Structured Finance Issue: Income Contingent Student Loans 1 (2002–2006)

After four and a half years of preparation, interrupted by two general elections and a Brexit referendum, the UK government securitised in December 2017 some £3.54bn of legacy student loans, creating a new and highly complex asset-class.

Sole arranger Barclays had been mandated in July 2013 and the end-result was Income Contingent Student Loans 1 (2002–2006), a securitisation so elaborate that its model came with a 90-page user manual to help investors run it.

The type of student loans in question – which are only repaid when a borrower’s income crosses a certain threshold – had never been securitised before. This is a far cry from the various forms of consumer risk that generally are on offer in the European marketplace.

The UK government had a £43bn book of broadly similar loans made to students who started university in 2012 or earlier, and wanted to raise £12bn by selling a portion over a five-year period.

So this first deal had to be repeatable, but its very execution was in considerable doubt after a snap post-Brexit general election brought the initial marketing process to a juddering halt a couple of months after it was officially unveiled early in 2017.

The deal then failed to immediately reappear after the June election due to the uncertainties of a hung parliament and when it did, it had to cope with heightened concerns about the UK economy after Brexit.

But such was the debut’s success that the government’s £15bn issuance target was hiked by an additional £3bn in the 2018 Autumn budget: marketing for the second deal began in October.

The securitisation targeted a £3.54bn portion of the oldest loans in the pre-2012 book, arguably the weakest cohort as this contains a higher proportion of lower-paid borrowers, because the better-paid ones have already repaid.

The ABS raised £1.7bn, a 51% discount. And unusually for a European deal, especially of this size, the complete capital stack was publicly sold to investors.

There may only be around 20 dedicated sterling buyers but around 200 different accounts were involved in the marketing process, which included over 90 physical meetings.

“There were five iterations of engaging investors, which was absolutely unprecedented,” said Edward Ballin, a director at Barclays. “I’ve never witnessed this sort of intensity over this sort of time period.”

Close to 40 investors participated in the deal.

While the £810.573m Class A1 (rated A/A) targeted traditional ABS investors, the £697.057m A2 (A/A) was designed for insurance companies, selling fixed-rate scheduled amortisation paper.

Below the seniors came the £120.61m Class B (BBB) RPI-linker, and at the bottom of the stack the unrated deeply discounted Class X, which was sized at £1.919bn and came at an 8.5% cash price, raising £163m for the government. The challenges around this tranche should not be underestimated, with one investor likening it to looking into a crystal ball.

Barclays, Credit Suisse, Lloyds and JP Morgan were joint bookrunners.