Fitch Places and Maintains Tranches of SLM 2003-12 & SLC 2008-1 on Rating Negative Watch

NEW YORK--()--Fitch Ratings has placed and maintained several tranches of SLM Student Loan Trust 2003-12 (SLM 2003-12) and SLC Student Loan Trust 2008-1 (SLC 2008-1) notes on Negative Watch. This follows the discovery of errors in implementing Fitch's counterparty criteria when analyzing cross-currency swaps in the transactions and do not take into account any rating considerations on the underlying asset performance. The rating actions are as follows:

SLM Student Loan Trust 2003-12:

--Class A-5 at 'AAAsf'; Placed on Rating Watch Negative;

--Class A-6 at 'AAAsf'; Maintained on Rating Watch Negative.

SLC Student Loan Trust 2008-1:

--Class A-4A at 'AAAsf'; Maintained on Rating Watch Negative;

--Class A-4B at 'AAAsf'; Maintained on Rating Watch Negative;

--Class B at 'AAAsf'; Maintained on Rating Watch Negative.

Fitch expects to finalize the assessment of the materiality of the inconsistencies, following error discovery, on both SLM 2003-12 and SLC 2008-1, and therefore resolve the Negative Watch by the end of January 2017. SLM 2003-12 class A-6 notes and SLC 2008-1 class A-4A, A-4B and B notes are currently on Negative Watch due to Fitch's ongoing assessment of maturity risk in the transactions (see: Fitch Maintains Various FFELP Trusts on Rating Watch Negative, dated 10 June 2016, on www.fitchratings.com).

KEY RATING DRIVERS

Correction: Fitch has found that as part of the initial and periodic rating analysis performed on cross-currency swaps attached to SLM 2003-12 Class A-6 notes and SLC- 2008-1 class A-4B notes, Fitch's counterparty criteria were not correctly implemented. This resulted in an assessment of counterparty risk in the transactions inconsistent with Fitch's counterparty criteria, affecting also USD-denominated SLM 2003-12 class A-5 notes and SLC 2008-1 class A-4A and B notes, whose payments are pro rata and pari passu or junior in the waterfall compared with swap payments.

For SLM 2003-12, inconsistent with Fitch's counterparty criteria, swap documents do not contemplate any swap counterparty replacement, or the appointment of a guarantor, following downgrade of the swap counterparty below the minimum ratings expected by Fitch's counterparty criteria. Fitch believes that counterparty replacement, or the appointment of a guarantor, are the only viable longer term options for a counterparty of a continuation-type derivative with deteriorating creditworthiness. In addition, collateralisation criteria are broadly in line with Fitch's expectation, in spite of lower volatility cushions than expected and no adjustments for liquidity and FX risk in collateral valuation.

Fitch's preliminary assessment of the materiality of the inconsistencies against any available mitigants, which included sufficient collateral posting and replacement provisions delinked from Fitch's ratings, suggested that contractual provisions could support ratings up to 'AAsf'.

For SLC 2008-1, swap documents do not envisage any collateral posting in line with Fitch counterparty criteria. In Fitch's opinion, posting collateral is a key remedial action for derivative exposures and one that can be credibly executed in a short timeframe. In Fitch's experience, unhedged FX risk in SF transactions is rarely a marginal rating driver. According to Fitch's counterparty criteria, the available contractual replacement trigger of 'BBB+' or 'F2' would support, without any collateral arrangements, ratings up to the 'A' category, which could result, upon resolving the rating watch negative, in the downgrade of the EUR-denominated class A-4B notes, as well as a downgrade from 'AAAsf' to 'A+sf' of the USD-denominated class A4-A and class B notes for which the swap payments are pro rata and pari passu or senior to interest payments in the waterfall.

RATING SENSITIVITIES

In the absence of additional contractual remedies, the resolution of the Rating Watch may result in a downgrade SLM 2003-12 class A-5 and A-6 notes by up to one rating category and in a downgrade of SLC 2008-1 class A-4A, A-4B and B notes by up to two rating categories.

This assessment of counterparty risk for SLM 2003-12 class A-5 and A-6 notes, which takes into account partial compliance of the swap documents with Fitch's criteria, represents a criteria variation from Fitch's counterparty criteria. Without this criteria variation, Fitch would downgrade the ratings of all notes to the rating of the swap counterparty.

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.

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

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016)

https://www.fitchratings.com/site/re/884964

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014696

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Fitch Ratings, Inc.
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New York, NY 10004
or
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Tracy Wan
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or
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sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eric Orenstein
Analyst
+1-646-582-4816
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Committee Chairperson
Tracy Wan
Senior Director
+1-212-908-9171
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com