The UK government has announced the second in a series of sales of pre-2012 “Plan 1” English student loans.
The £3.686bn loan book follows the first sale in the series, which completed in December 2017 and raised £1.7bn ($2.2bn).
The sale is open to all investor types, but has been structured into a securitisation in order to target specific tranches at specific markets. For insurers, the most interesting tranche is the £745m A2, which represents 20% of the overall offer.
The A2 tranche has an 11.6-year average duration, a scheduled amortisation profile and a fixed coupon of 2.5%. It is expected to receive an AA or A rating.
As one of the most senior tranches this strips out a good amount of pre-payment and default risk to ensure that if loans are paid off by graduates early, or do not get paid at all, cash flows from the student loan pool will prioritise the A2 above other tranches.
The face value of the outstanding balances of the loans in the scope of the sale is around £3.9bn at end of the 2016-17 financial year, but the government expects the proceeds of the sale to be lower due to the time value of money and the government subsidy inherent in student loans.
The sale is expected to be completed by the end of the year.
Buyers in the first sale were not publicly disclosed but it is understood that it was heavily oversubscribed.
Gareth Mee partner at EY EMEIA insurance - risk and actuarial services said: “For UK insurers this represents an interesting investment opportunity in a current environment of limited availability of sterling assets, particularly with yield structures that may support better value for annuity purchasers and pension schemes seeking to de-risk.”
EY is seeing a growing market for bespoke structures such as this which pass through borrowing requirements in a form which is attractive to lenders, he added. “We are delighted to be advising the Government on asset structuring for UK insurers and are very pleased to see UKGI developing innovative structured solutions which appeal to a range of institutional investors in order to maximise benefit for taxpayers.”
Aviva, Legal & General, Prudential were contacted for comment. Direct Line said it had not participated in the first and second sale.