NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to rate Navient Student Loan Trust 2016-3 as follows:
--$245,000,000 floating rate class A-1 notes 'AAAsf(EXP)'; Outlook Stable;
--$141,000,000 floating rate class A-2 notes 'AAAsf(EXP)'; Outlook Stable;
--$375,000,000 floating rate class A-3 notes 'AAAsf(EXP)'; Outlook Stable.
KEY RATING DRIVERS
High Collateral Quality: The trust collateral consists of FFELP loans including approximately 20.2% of rehab loans, with guaranties provided by eligible guarantors and reinsurance provided by the U.S. Department of Education (ED) for at least 97% of principal and accrued interest. Fitch currently rates the U.S. 'AAA'/Outlook Stable.
Sufficient Credit Enhancement (CE): Cash flow scenarios for the 2016-3 notes were satisfactory under Fitch's 'AAAsf' stresses. CE is provided by overcollateralization (OC) and excess spread. A target OC amount equal to the greater of 5.5% of the adjusted pool balance and $15 million must be met before excess cash can be released.
Adequate Liquidity Support: Liquidity support is provided by a reserve account sized at 1.75% of the initial student loan balance, which is funded at closing. The required reserve account balance for any distribution dates prior to the December 2019 distribution is 1.75% of the pool balance and 0.60% of the pool balance on or after the distribution date occurring on or after December 2019 until the June 2021 distribution. Thereafter, the requirement will be the greater of 0.25% of the current student loan balance and 0.10% of the initial student loan balance.
Acceptable Servicing Capabilities: Navient Solutions, Inc. and Pennsylvania Higher Education Assistance Agency (PHEAA) will service the trust's student loan pool. Fitch believes both are acceptable servicers of FFELP student loans due to their long history of servicing FFELP loans.
On Nov. 18, 2015, Fitch released its exposure draft which delineates revisions it plans to make to the 'Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria', dated June 23, 2014. Fitch has reviewed this transaction under the proposed criteria.
In certain LIBOR-down interest rate stress scenarios the basis spread may be compressed, as Fitch would apply a floor to 1-month LIBOR at a negative rate level in accordance with Fitch's "Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds" dated May 2016. Since the updated interest rate stresses are not addressed in exposure criteria, this represents a criteria variation. Use of the criteria variation did not have a measurable impact upon the ratings assigned.
Since FFELP student loan ABS rely on the U.S. government to reimburse defaults, 'AAAsf' FFELP ABS ratings will likely move in tandem with the 'AAA' U.S. sovereign rating. Aside from the U.S. sovereign rating, defaults and basis risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults and basis shock beyond Fitch's published stresses could result in future downgrades. Likewise, a buildup of credit enhancement driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.
Key Rating Drivers and Rating Sensitivities are further described in the updated presale report titled 'Navient Student Loan Trust 2016-3', dated June 6, 2016 available on www.fitchratings.com, or by clicking on the link.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Additional information is available at www.fitchratings.com.
Navient Student Loan Trust 2016-3 (US ABS)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 Dec 2015)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)
Exposure Draft: Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria (pub. 04 Dec 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Dodd-Frank Rating Information Disclosure Form