NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on the Vermont Student Assistance Corporation student loan asset-backed notes, series 2012-1:
--Senior class A notes affirmed at 'AAAsf', Outlook Stable;
--Subordinate class B notes upgraded to 'AAAsf' from 'AAsf', Outlook Stable.
The rating actions reflect the notes' sufficient credit enhancement and passing cash flow stresses at their respective rating levels. The Rating Outlook remains Stable as the notes are performing within expectations.
KEY RATING DRIVERS
U.S. Sovereign Risk: The trust collateral is comprised of 100% of Federal Family Education Loan Program (FFELP) loans. The credit quality of the trust collateral is high, in Fitch's opinion, based on the guarantees provided by the transaction's eligible guarantors and at least 97% reinsurance of principal and accrued interest provided by the U.S. Department of Education (ED).
Collateral Performance: Fitch assumes a base case default rate of 16.5% and a 49.4% default rate under the 'AAAsf' credit stress scenario. The claim reject rate is assumed to be 0.5% in the base case and 3% in the 'AAAsf' case. Fitch applies the standard default timing curve in its credit stress cash flow analysis. The trailing 12 month constant default rate, utilized in the maturity stress is 3.5%. The trailing 12 month levels of deferment, forbearance, income-based repayment (before adjustment) and constant prepayment rate (voluntary and involuntary) are 5.8%, 4.4%, 15.5%, and 10.1% respectively, which 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 0.1% based on information provided by the sponsor.
Basis and Interest Rate Risk: Fitch applies its standard basis and interest rate stresses to this transaction as per criteria.
Payment Structure: Credit Enhancement (CE) is provided by overcollateralization and excess spread. As of the August 2016 distribution report, senior parity is 109.3% (8.5% CE) and total parity is 105.2% (4.9% CE). Liquidity support is provided by a reserve account sized at the greater of 0.25% of the pool balance, and $1,176,783. The trust is in turbo, and cash cannot be released from the trust until the notes have been paid in full.
Maturity Risk: Fitch's student loan ABS cash flow model indicates that the 2012-1 notes are paid in full on or prior to their respective legal final maturity in Fitch's 'AAAsf' credit and maturity stresses.
Operational Capabilities: Day-to-day servicing is provided by Vermont Student Assistance Corporation (VSAC) services 100% of the loans. In Fitch's opinion, VSAC is an acceptable servicer of FFELP student loans. Additionally, Nelnet Servicing serves as back-up servicer for this trust. Fitch believes VSAC and Nelnet to be acceptable servicers of FFELP student loans.
Under Fitch's 'Counterparty Criteria for Structured Finance and Covered Bonds', dated June 18, 2016, money market funds not rated by Fitch require two other rating agencies to rate such investment. Since the money market definition for this trust references only one other rating agency, it is considered a criteria variation. Fitch does not believe such variation has a measurable impact upon the ratings assigned.
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. Additionally, Fitch does not address the application of actual trust performance data to project student loan defaults, and it is therefore also considered a criteria variation. In its analysis, Fitch assumed a base case default rate for the credit stresses based on actual trust performance, which was higher than the output from its default model. In doing so, there was no rating impact from such variation.
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 build-up of credit enhancement 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 Fitch, or reviewed by Fitch in relation to this rating action.
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)
Vermont Student Assistance Corporation, Series 2012-1 -- Appendix
Dodd-Frank Rating Information Disclosure Form
ABS Due Diligence Form 15E 1
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