Actionable Alternatives: Student Loan Investing

Text on screen: PIMCO

Text on screen: Actionable Alternatives: Student Loan Investing

Images on screen: Exterior building, data center, airplane departing

Kraus: We focus on private-label, credit-based student loans.

Text on screen: Kristofer Kraus, Portfolio Manager, Asset-Based Finance

Unlike federal student loans, private loans are fully underwritten to assess creditworthiness and ability to repay,  and are typically school-certified and co-signed by a parent or guardian.

FULL PAGE GRAPHIC: The graphic shows Kris Kraus on the left and three text callouts on the right. The first callout is Size, depicted by a chart icon. The second is Quality, depicted by a medal icon. The third callout is Changing Market, depicted by a climate icon showing the rising sun behind a cloud.

We think investing in student loans is attractive for 3 primary reasons: The size, quality, and changing nature of the market. Firstly

FULL PAGE GRAPHIC: The graphic shows Kris Kraus on the left and two bullets on the right with the title Size. The first bullet reads $1.74 trillion market, which is the size of the student loan market. The second bullet reads 2^nd largest consumer debt balance in U.S., after mortgages.

Today, the student loan market is valued at $1.74 trillion which represents the second largest consumer debt balance in the US, after mortgages.

FULL PAGE GRAPHIC: The graphic shows Kris Kraus on the left and two bullets on the right with the title Quality. The first bullet reads approximately 91% originated in the 2023-2024 school year were co-signed. The second bullet reads Higher FICO scores.

Second, by quality of the market we mean the strong fundamentals.

Approximately 91% of all private student loans originated in the 2023/2024 school year were co-signed, which generally perform better throughout credit cycles.

They have higher FICO scores versus other consumer loan products that you may see.

FULL PAGE GRAPHIC: The graphic shows Kris Kraus on the left and one bullet on the right with the title Changing Market, which reads 2008-19; grew 69% more than credit card balances and 70% more than mortgages.

Third, the attractive growth and a changing regulatory environment of student loan market is important to examine.

From 2008 to 2019, private student loans grew by 69% when compared to credit card balances and by over 70% when compared to residential mortgages.

FULL PAGE GRAPHIC – TITLE: Delinquencies. The subtitle reads (% of outstanding balance in repayment). The chart shows two lines plotting delinquencies from the third quarter of 2015 to the first quarter of 2024. The first line in dark blue shows a delinquency rate of 3.02% for loans 30-89 days past due (% of repayment) in the first quarter of 2024. The second line shows a delinquency rate of 1.61% for student loans 90+ days past due (% of repayment).

We see positive tailwinds from tightening standards, with 90+ day delinquency rates near record-lows today.

It’s important to look at the regulatory changes that have occurred in particular the CECL Regulations, or “Current Expected Credit Losses”. This requires banks to reserve capital for all future losses expected over the life of an investment, instead of when a probable loss has already been incurred.

This is most punitive to private student loans due to their longer duration. This has led many banks including some of the larger banks in the US to sell portfolios that they had on balance sheet to investment firms such as PIMCO.

Images on screen: Student signing a loan document; students walking at a college campus

As a result, we are seeing opportunities from banks that need to manage balance sheet constraints on the back of CECL implementation, and two, non-bank lenders who are growing their market share and need to free-up capital to originate new loans.

Text on screen: Vineet Agrawal, Portfolio Manager, Special Situations

Agrawal: PIMCO evaluates student loan opportunities through a three-step robust process.

FULL PAGE GRAPHIC: The graphic shows Vineet Agrawal on the right and PIMCO’s 3 step evaluation process on the left, which are: 1) Robust approach to data and analytics, depicted by a ; 2) Analyzing the pool relative to different macro environments; and 3) Assess relative value with consistent focus on downside protection.

Firstly, we look at the data and the characteristics of the pool. Secondly, we understand and try to figure out what would happen to this pool in various economic scenarios. Thirdly, we look at the relative value of the pool.

FULL PAGE GRAPHIC: The graphic shows Vineet Agrawal on the right and PIMCO’s 3 step evaluation process on the left, Robust approach to data and analytics. The first bullet reads Performance in current economic scenario? The second is Various historical scenarios?

We use  this data not only to see how the pool would perform in the current economic scenario, but how the pool would perform in various historical scenarios as well, including recessions.

FULL PAGE GRAPHIC: The graphic shows Vineet Agrawal on the right and PIMCO’s 3 step evaluation process on the left– Analyzing the pool relative to different macro environments. The introduction bullet reads: How is the pool structured in terms of FICO Scores, APRs, In school versus graduating, and co-signers.

 In terms of analyzing the pool, we start with stratification of the pool.

We look at how the pool is structured in terms of FICO scores, APRs, people who are in school versus graduating. People who have co-signed as a parent or not. After analyzing the pool in terms of stratification, we want to understand how the pool will perform in various stress scenarios.

FULL PAGE GRAPHIC: The graphic shows Vineet Agrawal on the right and PIMCO’s 3 step evaluation process  on the left– Assess relative value with consistent focus on downside protection. The bullet reads: Compensated for the illiquidity?

Lastly, we look at the pool in terms of related value, whether we are getting compensated for the illiquidity or not.

If we were  to invest in a hypothetical loan pool today, we'd try to find a non-bank partner or a bank lender who is setting the pool.

You want to make sure it's for the right reasons, that the loans originated as per the underwriting standards and are not of lower quality than what they're keeping on their own books. Secondly, we want to make sure that the characteristics of the pool, for example, APRs or FICOs, as the credit quality is maintained and is high.

Images on screen: College classrooms and graduation

Lastly, we look  at the diversification of the student loans, make sure that students are graduating over multiple years and not just in one particular year. This helps in case there's a recession in one particular year, the whole pool does not get impacted and because the students are graduating over multiple years, the recession impact is minimized.

Text on screen: For more insights and information visit pimco.com

Text on screen: PIMCO

Disclosures

This material (the “Material”) is being provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy interests in a fund or any other PIMCO trading strategy or investment product.

All investments contain risk and may lose value.The investment strategies discussed herein are speculative and involve a high degree of risk. Investments in mortgage and asset-backed securities are highly complex instruments that are sensitive to changes in interest rates and subject to early repayment risk. Structured products such as collateralized debt obligations are also highly complex instruments, typically involving a high degree of risk; use of these instruments may involve derivative instruments that could lose more than the principal amount invested. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. Investing in banks and related entities is a highly complex field subject to extensive regulation, and investments in such entities or other operating companies may give rise to control person liability and other risks. Collateralized Loan Obligations (CLOs) may involve a high degree of risk and are intended for sale to qualified investors only. Investors may lose some or all of the investment and there may be periods where no cash flow distributions are received. CLOs are exposed to risks such as credit, default, liquidity, management, volatility, interest rate, and credit risk. Private credit involves an investment in non-publicly traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.

References, either general or specific, to securities and/or issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.  Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment opportunities will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook is subject to change without notice.

Actual events or results may differ materially from those reflected or contemplated in any opinions contained herein. Certain information presented herein is as of a specified reference date, and may have changed significantly since such date.  Neither PIMCO nor any of their affiliates shall have any duty to update any of the information presented herein.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. . Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2024, PIMCO.

CMR2024-1007-3919803