NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the outstanding senior note of EdSouth Indenture No. 3, LLC at 'AAAsf'/Outlook Stable, and upgrades the outstanding subordinate note to 'AAAsf' from 'AAsf'/Outlook Stable. The actions are due to the notes passing both Fitch's credit and maturity stresses at the commensurate rating level, with the upgrade also due to sufficient hard credit enhancement which lessens the subordinate note's dependency on excess spread. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
U.S. Sovereign Risk: The trust collateral consists of Federal Family Education Loan Program (FFELP) loans, 9.9% of which are rehabilitated loans. Guarantees are provided by the transaction's eligible guarantors and reinsurance is provided by the U.S. Department of Education (ED) for at least 97% of principal and accrued interest. Fitch's U.S. sovereign rating is currently 'AAA'/Outlook Stable.
Collateral Performance: Fitch assumes a base case default rate of 17.75% and a 47.25% default rate under the 'AAAsf' credit stress scenario. The claim reject rate is assumed to be 0.25% in the base case and 2% in the 'AAAsf' case. Fitch applies the standard default timing curve in its credit stress cash flow analysis. The trailing 12-month (TTM) average constant default rate, utilized in the maturity stresses, is 3.3%. TTM average levels of deferment, forbearance, income-based repayment (before adjustment) and constant prepayment rate (voluntary and involuntary) are 9.6%, 13.3%, 14.3% and 15.5%, respectively, and are used as the starting point in cash flow modelling. Subsequent declines or increases are modelled as per criteria. The borrower benefit is assumed to be approximately 0.3%, based on information provided by the sponsor.
Basis and Interest Rate Risk: Fitch applies its standard basis and interest rate stresses to this trust as per the agency's criteria.
Payment Structure: Credit Enhancement (CE) is provided by excess spread, overcollateralization, and for the class A note, subordination of the class B note. As of the September 2016 distribution date, senior parity is 110.9% (9.8% CE) and total parity is 106.2% (5.8% CE). Liquidity support is provided by a reserve account currently sized at the required floor of $702,593.75. The trust is currently in turbo, and excess cash will not be released from the trust until both the class A note and class B note are paid in full, sequentially.
Maturity Risk: Fitch's student loan ABS cash flow model indicates that the notes are paid in full on or prior to the legal final maturity dates under the commensurate rating scenario.
Operational Capabilities: Day-to-day servicing is provided by Great Lakes Educational Loan Services, Inc. (Great Lakes) and Pennsylvania Higher Education Assistance Agency (PHEAA), managing approximately 8% and 92% of the outstanding loan portfolio, respectively. Fitch believes both Great Lakes and PHEAA are acceptable servicers of FFELP student loans.
Under Fitch's criteria 'Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria', dated July 26, 2016, Fitch does not address the process by which it gives certain credit to short-term assets in its cash flow analysis, and it is therefore considered a criteria variation.
Since the FFELP student loan ABS relies 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, basis risk, and loan extension risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults, basis shock beyond Fitch's published stresses, lower than expected payment speed, and other factors could result in future downgrades. Likewise, a buildup of CE driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
Fitch has taken the following actions:
EdSouth Indenture No. 3, LLC:
--Class A note affirmed at 'AAAsf'; maintain Outlook Stable.
--Class B note upgraded to 'AAAsf' from 'AAsf'; maintain Outlook Stable.
Additional information is available at www.fitchratings.com.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria (pub. 26 Jul 2016)
Dodd-Frank Rating Information Disclosure Form
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