Sallie Mae Boosts ABS Issuance Amid Hunt for Yield, Lord Says

SLM Corp., the student lender known as Sallie Mae, is boosting its asset-backed issuance as demand surges with interest rates holding close to zero into a fifth year, according to Chief Executive Officer Albert Lord.

Credit markets “are substantially more liquid than they were even just last year,” Lord said today in a conference call with investors. “Virtually all participants are looking for yield. While these markets are as liquid and as active as they are, Sallie Mae will continue to be active.”

The Federal Reserve’s effort to stimulate economic growth by suppressing borrowing costs is pushing investors to take on more risk, a boon for companies like Sallie Mae that rely on bond buyers to fund originations. The lender is issuing riskier debt even as concern mounts that college graduates are buckling under ballooning loan payments.

The Newark, Delaware-based lender in February issued the first subordinate bond tied to education debt without government guarantees since 2007, according to data compiled by Bloomberg. Subordinate debt, which shields AAA bonds by absorbing losses first, is the riskiest portion of the deal.

The access to capital markets is “very heartening, particularly our ability to move the subordinate piece,” Lord said.

Additionally, Sallie Mae sold the so-called residual interests in $3.8 billion in asset-backed bonds linked to government-guaranteed loans in the first quarter, and plans to close a similar transaction during the next two months, Lord said. Residual interests are the cash that’s left over after bondholders have been paid.

Delinquency Rates

Student-loan delinquency rates in 2012 were highest among borrowers under the age of 30 who are repaying their debt, according to the Federal Reserve Bank of New York. Thirty-five percent were 90 or more days behind, compared with 21 percent in 2004.

Delinquencies in Sallie Mae’s portfolio are “starting to feel a lot better,” since the lender stopped making loans for non-traditional schools such as for-profit institutions, Lord said. The charge-off rate, or the percentage of loans that have been written off, was unchanged from a year ago at 3 percent in the first quarter, the company said yesterday in a statement distributed by Business Wire. The proportion of payments more than 90 days late fell to 3.9 percent from 4.4 percent a year ago.

Sallie Mae is increasing its private student loan originations after being cut out of the business for government-guaranteed lending in 2010. Sallie Mae made $1.4 billion in education loans in the first quarter, a 22 percent increase from the year-ago period, according to the statement.

The amount of educational debt, which includes federally backed and private loans taken out by students and parents, has almost tripled in the past seven years to $966 billion, the New York Fed said in a Feb. 28 report.

Student loans accounted for about 34 percent of $2.75 trillion in outstanding non-mortgage consumer debt in the fourth quarter, up from 16.5 percent in the first quarter of 2005, Fed data show.