Contingent Liabilities & the Sale (5 of 5)

On 31 October 2017, when the student loan sale process was restarted following the General Election, Jo Johnson placed a Departmental Minute in the House of Commons Library outlining the contingent liabilities that the government would have to assume to proceed with a sale.

There are four areas where liability might arise and these would be recorded in subsequent DfE accounts:

• Under certain conditions, the government would have to commit to repurchasing the securities issued:
  • RPI being abolished and not being replaced with a suitable substitute;
  • gross repayment collection failure (defined as missing three years of payments);
  • changed collection terms removing HMRC from the equation.
• The government would offer an indemnity to purchasers against losses arising from any failure in the servicing of the securitisation;
• The government would enter into the standard market indemnity against any misrepresentation of the loans in its sale prospectus;
  • this “Joint Lead Managers” indemnity is uncapped and in place as long as the securities are outstanding.
• and finally, to guard against “democratic risk”, there will be compensation to purchasers were a future government to make changes to the loans:

A third area of contingent liability arises due to the offer of a compensation mechanism which provides assurance to investors that they will be made whole for changes made by the Government: (i) to the terms of the sold loans which affect repayments and therefore cashflows; and/or (ii) specified changes to their regulatory status which would have a material adverse effect on the securities. This would only apply to pre-2012 loan terms. The risk of these specific events occurring depends on the direction of future government policy.

With respect to the last, the government cannot prevent future governments from abolishing these sold loans or changing their terms, but it can set up a compensation mechanism which would prove off-putting to any such radical plans.

In sum, these contingent liabilities would have to be considered when deciding whether Income Contingent Student Loans 1 (2002-2006) Plc really is sufficiently independent of government to be considered a private sector entity.