NEW YORK--(BUSINESS WIRE)--Fitch Ratings is evaluating a variety of proposals and alternative solutions from market participants including issuers, investors and arrangers to address the risk that certain U.S. FFELP student loan ABS tranches may extend beyond their legal final maturity dates. Such proposals include:
--Amendments to transaction documents that allow increased loan repurchases;
--Potential amendments to transaction documents that would extend the current legal final maturity; and
--Repackaging tranches with heightened maturity risk into new transactions with significantly longer legal final maturity dates.
Fitch believes these proposals may help mitigate maturity risk to varying degrees and will take the following considerations into account when evaluating tranches at risk for maturity extension.
Issuer Repurchases
One of the first steps taken to address maturity risk has been to amend transaction documents to allow for an increased level of loan purchases. Navient amended 17 transaction documents to allow for up to 10% of the original pool balance to be purchased from individual trusts. In evaluating programmatic and bulk loan purchases from trusts, Fitch will consider the ability of the issuer to make such purchases and review the post-purchase tranche balance, payment speeds and amortization pattern to determine if the risk has been sufficiently reduced to a level commensurate with the current rating.
Maturity Extensions
Issuers are also working with investors to get approval to extend the maturity dates of tranches with heightened maturity risk. To implement such a change, 100% of affected investor approval is typically required. While challenging from an administrative perspective, this approach is relatively straightforward. Post change, investors would continue to receive interest payments in accordance with the original or new terms and would ultimately be paid in full by the new maturity date. A missed original maturity date would not be considered an event of default if all bondholders agree to the extension. As a result, if the maturity date is extended sufficiently, it is likely that the tranche would retain its 'AAA' rating. Fitch would not consider these types of maturity extensions to be distressed debt exchanges.
Repackaging
Issuers, investors and arrangers are also considering repackaging certain FFELP student loan ABS tranches into new securities with extended maturity dates. In its simplest form, an existing tranche with heightened maturity risk would be placed in a trust and a new security with a significantly longer maturity date would be issued in its place. Assuming a straight pass through of cash flows the new security could in theory obtain a 'AAA' rating. Fitch would need to be confident to a 'AAA' level that the new maturity date would not be breached. In doing so, Fitch would also need to consider potential cash flow changes on the underlying security as well as any uncapped costs and other fees associated with the repackaged transaction. The original rating of the security will remain outstanding and could face downgrades under Fitch's criteria for rating FFELP student loans.
During the past two months, Fitch has placed 65 tranches from 27 transactions on Rating Watch Negative reflecting the heightened risk that the tranches may not be fully repaid by their legal final maturity dates. Missing this date is typically an event of default under the terms of the transaction documents. In an event of default, FFELP ABS bondholders will continue to benefit from the US Government's 97%--100% guarantee on the underlying loans providing a high likelihood that these tranches will ultimately be paid.
Over the past several years, payment rates in many student loan transactions have remained historically slow due to a combination of factors including: slower voluntary prepayments; higher levels of deferment and forbearance; and more recently, greater usage of income based repayment plans., Fitch is reviewing its criteria to and considering revisions to its maturity stresses to address these trends.
Outlook
Fitch will continue to review FFELP SLABS tranches currently on Rating Watch Negative and assess its criteria as it develops new maturity stresses. Once finalized and communicated with the market, rating actions will be taken as appropriate. In the meantime, market participants appear to be working cooperatively and diligently to address the heightened maturity risk and propose alternative solutions.
Additional information is available at 'www.fitchratings.com'.
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