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New $585M ABS deal, HSA deposits part of Sallie Mae's funding effort

Not long after Sallie Mae Executive Vice President and CFO Steven McGarry said his company would continue to "opportunistically" engage in securitization, the $585 million SMB Private Education Loan Trust 2017-A has come to market.

S&P Global Ratings on Jan. 27 issued preliminary ratings of AAA(sf) to the $221 million in class A-1 private education loan-backed notes. It also assigned preliminary ratings of AAA(sf) to the fixed- and floating-rate class A-2A and A-2B notes as well as A(sf) to the class B notes.

The notes will be backed by a $655.8 million pool of deferred-payment, fixed-payment and interest-only Smart Option loans originated by Sallie Mae Bank largely to borrowers enrolled in traditional four-year higher education programs.

Sallie Mae conducted three private student loan ABS deals in 2016, though the first of those transactions did not take place until May of that year. Since the 2014 split with Navient Corp., Sallie Mae has conducted seven private student loan ABS deals worth $4.38 billion in the aggregate.

The company said in a recently published slide deck that it maintains the capacity to securitize $2 billion to $3 billion of private education loans to augment its deposit funding for future growth. McGarry said the company is planning to do $1.5 billion of term ABS in 2017 and potentially more if the market cooperates.

"As we sit here today," McGarry said during a Jan. 19 conference call, "the deposit market and the ABS market are currently showing very favorable conditions from a cost of funds perspective, and we hope that that remains the case over the course of 2017."

He added that the company would be "teeing up a deal very shortly because spreads are pretty attractive." That contrasts with his comments of a year earlier when he told investors and analysts on a call that Sallie Mae was taking what might best be characterized as a wait-and-see approach to securitizing loans.

Between the July 2016 SMB 2016-B and the October 2016 SMB 2016-C, according to the slide deck, spreads on the class A-1 notes narrowed by 10 basis points relative to one-month LIBOR. On the class A-2A and A-2B notes, spreads came in by 35 basis points on month the fixed- and floating-rate tranches between the two transactions. McGarry previously opined that the October 2016 deal was "probably the best private student loan transaction since the financial crisis" from an execution perspective.

Retail and brokered deposits accounted for 40% and 46%, respectively, of Sallie Mae's 2016 funding mix, according to the presentation, with secured debt responsible for the remaining 14%. The company's target is for secured debt to account for 20% of the funding mix to complement a blend of retail and brokered deposits.

Sallie Mae reported $7.09 billion of brokered deposits and $6.35 billion of retail and other deposits as of the fourth quarter of 2016. The amount of brokered deposits declined from $7.32 billion in the year-earlier period while retail and other deposits surged from $4.16 billion in the fourth quarter of 2015. Brokered deposits were even higher in the third quarter of 2016 at $7.77 billion.

McGarry said that Sallie Mae has been targeting deposits related to 529 education savings plans and health savings accounts. Approximately $3 billion of the fourth-quarter 2016 deposits related to that type of business. He described Sallie Mae as "one of the happy recipients" of health savings account deposits collected by "the big aggregators."

"That is a business that we will continue to focus on growing because the funding is very efficient," McGarry said. "It is core and not brokered deposits and it does come in on long-term agreements. So these are multiyear deposits that we take in."