Fitch Takes Various Actions on SLM 2007-2

NEW YORK--()--Fitch Ratings has taken the following rating actions on SLM Student Loan Trust 2007-2 (SLM 2007-2):

--Class A-3 downgraded to 'BBBsf' from 'AAAsf'; removed from Rating Watch Negative and assigned Outlook Stable;

--Class A-4 downgraded to 'Bsf' from 'AAAsf'; removed from Rating Watch Negative and assigned Outlook Stable;

--Class B downgraded to 'Bsf' from 'Asf'; removed from Rating Watch Negative and assigned Outlook Stable.

The class A-3 notes miss their legal final maturity date under Fitch's maturity 'BBB' cases. This technical default would result in interest payments being diverted away from class B, which would cause that note to default as well. Downgrading to 'BBBsf' rather than 'BBsf, is because the maturity date is over two years away, and the notes would be eligible for a one category rating tolerance described in the U.S. FFELP Student Loan ABS criteria.

The class A-4 notes miss their legal final maturity date under both Fitch's credit and maturity base cases. This technical default would result in interest payments being diverted away from class B, which would cause that note to default as well. In downgrading to 'Bsf' rather than 'CCCsf' or below, Fitch has considered qualitative factors such as Navient's ability to call the notes upon reaching 10% pool factor, the revolving credit agreement in place for the benefit of the noteholders, and the eventual full payment of principal in modelling.

The trust has entered into a revolving credit agreement with Navient by which it may borrow funds at maturity in order to pay the off notes. Because Navient has the option but not the obligation to lend to the trust, Fitch cannot give full quantitative credit to this agreement. However, the agreement does provide qualitative comfort that Navient is committed to limiting investors' exposure to maturity risk.

KEY RATING DRIVERS

U.S. Sovereign Risk: The trust collateral comprises 100% 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. The U.S. sovereign rating is currently 'AAA'/Outlook Stable.

Collateral Performance: Fitch assumes a base case default rate of 14.75% and a 44.25% default rate under the 'AAA' credit stress scenario. The base case default assumption of 14.75% implies a constant default rate of 4.5% (assuming a weighted average life of 9.9 years) consistent with the trailing 12 month (TTM) average constant default rate utilized in the maturity stresses. Fitch applies the standard default timing curve. The claim reject rate is assumed to be 0.50% in the base case and 3% in the 'AAA' case.

The trailing 12 month average of deferment, forbearance, Income-based repayment (prior to adjustment) and constant prepayment rate (voluntary and involuntary) are 11.3%, 16.5%, 15.9% and 11.5%, 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 0.01%, 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 is provided by excess spread, overcollateralization, and, for the class A notes, subordination. As of September 2016 distribution, total and senior effective parity ratios, respectively, are 100.46% (0.46% CE; inclusive of the reserve account) and 116.83% (14.40% CE). Liquidity support is provided by a reserve account sized at the greater of 0.25% of the pool balance and $4,000,000, currently equal to $4,000,000. The trust will continue to release cash as long as 100.00% total parity is maintained.

Maturity Risk: Fitch's student loan ABS cash flow model indicates that A-3 notes pass their maturity stress up to 'BB' scenarios. The A-4 and B notes, do not pay off before their maturity date in Fitch's modelling scenarios, including the base cases. If the breach of the class A-3 or A-4 maturity date triggers an event of default, interest payments will be diverted away from the class B notes, causing them to fail the base cases as well.

Operational Capabilities: Day-to-day servicing is provided by Navient Solutions, Inc. (formerly known as Sallie Mae, Inc.). Fitch believes Navient to be an acceptable servicer of FFELP student loans.

CRITERIA VARIATIONS

Under the 'Counterparty Criteria for Structured Finance and Covered Bonds', dated July 18, 2016, Fitch looks to its own ratings in analyzing counterparty risk and assessing a counterparty's creditworthiness. The definition of permitted investments for this deal allows for the possibility of using investments not rated by Fitch, which represents a criteria variation. Fitch does not believe such variation has a measurable impact upon the ratings assigned.

RATING SENSITIVITIES

'AAAsf' rated tranches of most FFELP securitizations will likely move in tandem with the U.S. sovereign rating, given the strong linkage to the U.S. sovereign by nature of the reinsurance and SAP provided by ED. Sovereign risks are not addressed in Fitch's sensitivity analysis.

Fitch conducted a CE sensitivity analysis by stressing both the related lifetime default rate and basis spread assumptions. In addition, Fitch conducted a maturity sensitivity analysis by running different assumptions for the IBR usage and prepayment rate. The results below should only be considered as one potential model implied outcome as the transaction is exposed to multiple risk factors that are all dynamic variables.

Credit Stress Rating Sensitivity

--Default increase 25%: class A 'CCCf'; class B 'CCCsf'

--Default increase 50%: class A 'CCCsf'; class B 'CCCsf'

--Basis Spread increase 0.25%: class A 'CCCsf'; class B 'CCCsf'

--Basis Spread increase 0.50%: class A 'CCCsf'; class B 'CCCsf'

Maturity Stress Rating Sensitivity

--CPR decrease 50%: class A 'CCCsf'; class B 'CCCsf'

--CPR increase 100%: class A 'Bsf'; class B 'CCCsf'

--IBR Usage increase 100%: class A 'CCCsf'; class B 'CCCsf'

--IBR Usage decrease 50%: class A 'CCCsf'; class B 'CCCsf'

The stresses are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration in trust performance. Rating sensitivity should not be used as an indicator of future rating performance.

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.

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. 26 Oct 2016)
https://www.fitchratings.com/site/re/888492

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. 10 Nov 2016)
https://www.fitchratings.com/site/re/889777

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014868

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014868

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

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Contacts

Fitch Ratings
Primary Analyst:
Phillip Chan, +1-212-908-0745
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Committee Chairperson:
Tracy Wan, +1-212-908-9171
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Phillip Chan, +1-212-908-0745
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Committee Chairperson:
Tracy Wan, +1-212-908-9171
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com