Fitch Expects to Rate State Board of Regents of the State of Utah, Series 2016-1; Presale Issued

NEW YORK--()--Fitch Ratings expects to assign the following ratings to the State Board of Regents of the State of Utah Series 2016-1 (Utah 2016-1) student loan-backed notes:

-- $441,800,000 series A notes 'AAAsf(EXP)'; Outlook Stable;

-- $10,450,000 series B notes 'AAsf(EXP)'; Outlook Stable.

KEY RATING DRIVERS

U.S. Sovereign Risk: The trust collateral comprises Federal Family Education Loan Program (FFELP) 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's U.S. sovereign rating is currently 'AAA'/Outlook Stable.

Collateral Performance: Fitch assumes 14.25% base case default rate and 42.5% under the 'AAAsf' credit scenario. The claim reject rate is assumed to be 0.25% for the base case and 2% for the 'AAAsf' case. Fitch applies the standard default timing curve, constant default rate (CDR) and prepayment assumptions for FFELP loans in its cash flow analysis. Current level of deferment, forbearance and income-based repayment (IBR) are 10.3%, 9.2% and 9.5%, respectively, which are used as the starting point in cash flow modeling. Subsequent declines or increases are modeled as per criteria. Fitch assumes 0.47% borrower benefits in the cash flows analysis based on information provided by the Board.

Basis and Interest Rate Risk: Fitch applies its standard basis and interest rate stresses to this transaction as per criteria.

Payment Structure: Cash flow scenarios for the 2016-1 notes were satisfactory under 'AAAsf' stress case for series A notes and 'AAsf' stress case for series B notes, using Fitch's Student Loans ABS cash flow model (SLABS). Total credit enhancement (CE) is provided by overcollateralization and excess spread and, at closing, total parity is expected to be 102.09%. Additionally, the senior notes benefit from subordination provided by the series B notes with a starting senior parity of 104.5%. Liquidity support for the Utah 2016-1 notes is provided by a $500,000 capitalized interest account and a $1.13 million reserve account funded at closing with note proceeds. The specified reserve fund balance is equal to the greater of 0.25% of the outstanding balance of the notes and $678,375.

Maturity Risk: Fitch's SLABS 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 The State Board of Regents of the State of Utah. Pennsylvania Higher Education Assistance Agency will act as backup servicer. Fitch believes both entities to be acceptable servicers of FFELP student loans.

Fitch will treat certain assets such as claims filed as short-term assets in its cash flow analysis. Given that Fitch's current criteria is silent on the treatment of such assets, this treatment is considered a criteria variation. Fitch does not believe such variation has a measurable impact upon the ratings assigned.

RATING SENSITIVITIES

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 build-up of CE 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 'State Board of Regents of the State of Utah, Series 2016-1', dated Oct. 14, 2016 available on www.fitchratings.com, or by clicking on the link.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

No third-party due diligence was provided or reviewed in relation to this rating action.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under 'Related Research' below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions,' dated May 31, 2016.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
https://www.fitchratings.com/site/re/886006

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
https://www.fitchratings.com/site/re/879815

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/site/re/883130

Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria (pub. 26 Jul 2016)
https://www.fitchratings.com/site/re/881705

Related Research

State Board of Regents of the State of Utah, Series 2016-1 (US ABS)
https://www.fitchratings.com/site/re/889068

State Board of Regents of the State of Utah, Series 2016-1 -- Appendix
https://www.fitchratings.com/site/re/889134

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013191

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013191

Endorsement Policy
https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Melvin Zhou, +1-212-908-0503
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Shaw, +1-212-908-0218
Associate Director
or
Committee Chairperson
Kevin Corrigan, +1-212-908-9156
Senior Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Melvin Zhou, +1-212-908-0503
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Shaw, +1-212-908-0218
Associate Director
or
Committee Chairperson
Kevin Corrigan, +1-212-908-9156
Senior Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com