Fitch Affirms KHESLC 2013-2 Sr. Notes; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Kentucky Higher Education Student Loan Corp. (KHESLC), Series 2013-2 senior note at 'AAAsf'. The Rating Outlook remains Stable.

KEY RATING DRIVERS

U.S. Sovereign Risk: The trust collateral consists of 100% (91.17% Non-Rehab and 8.83% Rehab) 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 reinsurance provided by the U.S. Department of Education (ED) for at least 97% of principal and accrued interest.

Collateral Performance: Fitch assumes a base case default rate of 17.5% and a 51.5% 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 constant default rate, utilized in the maturity stress is 4.2%. The trailing 12 month levels of deferment, forbearance, income-based repayment (before adjustment) and constant prepayment rate (voluntary and involuntary) are 9.7%, 6.9%, 24.7%, and 12.9% 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 0.26% for interest rate reductions and approximately $1 million of principal reductions based on information provided by the issuer.

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 September 2016 distribution report, parity is 108% (7.4% CE). Liquidity support is provided by a reserve account sized at the greater of 0.25% of the principal balance of the notes outstanding, and 0.15% of the initial note balance. 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 SLABS cash flow model indicates that the 2013-2 notes are paid in full on or prior to their respective legal final maturity in Fitch's AAA credit and maturity stresses.

Operational Capabilities: KHESLC is responsible for day-to-day servicing of the trust and Nelnet Servicing LLC provides backup servicing. Fitch believes both are 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.

RATING SENSITIVITIES

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.

DUE DILIGENCE USAGE

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.

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

Kentucky Higher Education Student Loan Corporation Series 2013-2 - Appendix
https://www.fitchratings.com/site/re/721495

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013390

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013390

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

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or
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Contacts

Fitch Ratings, Inc.
Jeffrey Prackup, +1-212-908-0839
Director
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Tracy Wan, +1-212-908-9171
Senior Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com