NEW YORK (MainStreet) —The SLM Corporation, otherwise known as Sallie Mae, the private student loan provider, yanked a debt offering yesterday afternoon at a time when students loan defaults were likely deemed high enough to be problematic. The $225 million offering had been on the market for about two weeks, with Bank of America leading the deal. Demand was tepid for the 3.5% coupon yield.
SLM Corporation originates, acquires and services private student loans in the United States through its business services, consumer lending, and FFELP Loans—the Federal Family Education Loan Program. It also provides servicing, loan default aversion, and defaulted loan collection services for loans owned by the Department of Education, Guarantors of FFELP Loans and other institutions.
As of last week, Sallie Mae and other student loan lenders sold $7.8 billion in securities so far this year, up from $5.7 billion at this time last year, according to Bank of American Merrill Lynch.
The bond, the first of its type from Sallie Mae in more than a decade, would have been riskier than most student loan-backed securities since payments on the loans didn’t back the bonds. Instead, the debt was going to be backed by excess cash-flow pooled after payments were made to holders of old Sallie Mae securities issued in 2006 and 2007 and backed by federal student loans. The excess cash is known as the “residual” position in the securities retained by the firm.
If timing is nearly everything, it was not clear why Sallie Mae picked now to consider testing the market with this type of bond offering.
While it may be a stretch to draw parallels with the junk market, investors have been drawn to securities backed by student loans because of the additional yield they provide over safer debt. This has been happening despite a significant rise in defaults on such loans. According to a recent report by the New York fed, borrowers who are late on their debt payments by 90 days or more climbed to 31% in 2012 from 24% in 2008.