The UK Government has begun a much-delayed sale of asset-backed securities backed by student loans, in what it expects to be the first of a series of sales that could bring in £12bn for the finance ministry.
The plan to re-package student loans via securitisation — an instrument famously used to repackage sub-prime mortgage loans in the run-up to the 2008 financial crisis — and sell them on to investors was expected to be launched earlier this year.
It was then put on hold after Prime Minister Theresa May called a snap election.
In the first tranche of the deal, the government will repackage £3.7bn of student loans, though the actual proceeds are expected to be lower.
“A subsidised interest rate is charged on the loans and repayments are uncertain because they are income contingent, so the government does not expect the outstanding balances to be repaid in full,” the UK government said in a statement.
The students covered by the loans in question only start to repay after they start earning above £17,775 a year.
Furthermore, the earnings threshold moves in line with the retail price index (RPI) each year.
Government borrowing unexpectedly grew last month, underscoring finance minister Philip Hammond’s challenge as he weighs calls for more spending in his budget on Wednesday against the prospect of weaker economic growth ahead.
An update from banks working on the deal this week suggested that marketing for the deal is drawing to a close.
The UK government is now expected to start negotiating pricing with investors next week with the publication of “initial price thoughts”, with pricing expected the following week.
The securitisation, which will have four tranches with a range of ratings from Single A to unrated, will be sold through a special purpose vehicle (SPV) called Income Contingent Student Loans 1.
Barclays is sole arranger, and joint lead manager on the rated notes with Credit Suisse, JP Morgan and Lloyds. Barclays and JP Morgan are joint lead managers on the unrated tranche.