NEW YORK--(BUSINESS WIRE)--Proposed changes to retention rules could reduce issuers' advance rates in securitization and limit their options to sell the equity stake or move down the risk spectrum in student loan ABS deals, Fitch Ratings says. Six federal regulators proposed rules that would change the risk retention requirements in Dodd-Frank and solicited comments. However, state issuers would be exempted from this rule.
If the proposal is accepted in its current form to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), we would expect most Federal Family Education Loan Program (FFELP) ABS deals to continue to be eligible to earn 'AAA' ratings at issuance. The proposed risk retention rules would be limited to the 2%-3% nonreimbursable portion of federal guarantee for most transactions. Most FFELP ABS transactions structured with 102%-104% senior parity and 100%-101% total parity at closing typically achieve 'AAA' ratings for senior notes and 'A' for subordinated notes.
The proposed rule would require issuers to retain 5% of private student loan ABS deals. This rule would not have had an impact on most private student loan transactions issued since the financial crisis began, as these deals were typically structured with more than 5% credit enhancement levels at closing. Most 'AAA' rated deals start with 20%-30% overcollateralization (OC) while 'A' rated deals begin with 5%-15% hard OC retained by the issuer as equity. However, if issuers attempt to increase the advance rate by reducing the residual piece or carving out lower rated tranches, 5% retention rule would create an OC floor in terms of how far the issuers can go down the spectrum.
Loans may be exempted from the proposed rule if they reach the longer of either two years or 33% pool factor. In our view, this exemption would be prudent as most defaults in student loan ABS occur in the first few years after loans enter repayment. However, we believe few will be eligible because the 33% pool factor hurdle is significant.
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