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The UK government is set to book a loss of almost £1bn from its largest ever privatisation of student loans, raising questions over the valuation of tens of billions of pounds of remaining graduate debt.
The controversial sale of a batch of student loans this week is expected to raise around £1.7bn, according to an Financial Times analysis of deal documentation.
The loans, which had a face value of £3.7bn last year, are part of a total of £43bn in loans made to students up to 2012, which are currently on government books valued at just under £30bn, according to the Department of Education’s latest published accounts, as of the end of March this year.
The sale to specialist investors — including pension funds and hedge funds — values the block of loans at around £800m lower than their accounting value on the books of the DfE, based an FT analysis of UK public accounts and the offer documents.
The government has previously warned the assets would be sold below their face value, but the scale of the losses in relation to their accounting value was not apparent until initial pricing ranges of the securitisation were released this week.
The deal will raise around £1.7bn in cash through the securitisation process, where assets are packaged together and sold off as bonds to investors. The process is a common feature of financing for student borrowing in the US, but has rarely been used in the UK.
The government’s loan book sale is dependent on passing a “value for money” test, which is designed to ensure that public assets are not sold too cheaply. The details of the test will not be made public, but it is expected to provide a different, lower valuation for the loans compared to those on the DfE accounts.
The sale of the loans is part of a wider government effort to sell public assets “in a way that secures good value for money for taxpayers”, according to a statement on the student loans company website. The government aims to raise a total of £12bn through selling an unspecified amount of pre-2012 student loans over the next five years.
Barclays is acting as sole arranger for the sale, alongside bookrunners Credit Suisse, Lloyds and JPMorgan. Rothschild is acting as an independent adviser to the government.
UK Government Investments, the government agency managing the sale, and the Department of Education both declined to comment.
Proportion of graduates with outstanding loans who failed to make a payment in 2015-16
The transaction is made up of loans issued between 2002 and 2006, on which repayments are linked to income.
Around half of students who borrowed during that period had already paid off their loans by the end of the 2015-16 financial year, meaning the pool of debt included in the deal is likely to be of a lower credit quality.
Of those graduates with outstanding loans, only 60 per cent made a repayment in the same financial year.
Although the low sale price could call into question the valuation of all loans slated for securitisation, pools of student loans originated after 2006 may be valued differently.
Part of the motive for the sale is to reduce public debt. The cash generated from the transaction will go towards reducing public sector net debt, which was £1.79tn at the end of October. Unlike cash, student loan assets do not count towards the calculation of public sector net debt.
Rob Ford, a partner at investment firm TwentyFour Asset Management, said the riskiest portion of debt sold through the securitisation is “basically . . . a distressed debt-like instrument”.
“If 40 per cent of them didn’t pay a penny then you’ve really got to assume that that’s a trend that isn’t necessarily going away,” he said.