NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed 238 tranches from 118 trusts of U.S. Federal Family Education Loan Program (FFELP) student loan ABS on Rating Watch Negative. In addition, Fitch has maintained the Rating Watch Negative on 77 tranches currently on Rating Watch Negative. In total, approximately $37.5 billion of outstanding FFELP ABS bonds are on Rating Watch Negative.
A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
The Rating Watch Negative actions are based on analysis conducted by Fitch that identified trusts with tranches that have heightened risk of missing legal final maturity dates. The magnitude of the rating actions with respect to those bonds placed on Rating Watch Negative could vary significantly depending on remaining time to maturity, recent payment trends, issuer actions such as loan purchases, or other external factors. Absent any issuer actions, structural or other mitigants, it is possible that 'AAA' ratings could be lowered to noninvestment grade rating categories.
In taking today's actions, Fitch identified trusts with one or more individual tranches most at risk of missing their legal final maturities under various stressed rating scenarios. In an event of default, scenario where a bond is not paid in full by legal final maturity, Fitch would expect ultimate repayment of full principal and interest on all tranches after the legal final maturity. Tripping an event of default, however, could have adverse rating implications for additional tranches. The rating implications will depend on the waterfall mechanics and voting rights and actions of investors. When an event of default occurs, it is highly likely that the class B notes will not receive timely interest as the principal for the class A notes must be paid in full prior to the class B notes receiving interest. Therefore, Fitch will not rate subordinate notes higher than any senior notes in the same trust.
The main drivers of the heightened maturity risk are prepayments and principal repayment rates coming in more slowly than initial expectations. The decline in prepayment rates has followed the consolidation wave and a slow recovery in the job market for graduates during and after the recession. The growth of government sponsored student loan payment plans, such as the Income Based Repayment Plan has also resulted in slower overall repayment speeds. Helping offset these declines more recently are an improving in labor market, expansion of debt consolidation programs, seasoning of portfolios and recent issuer actions to address this risk.
On Nov. 18, 2015, Fitch released its exposure draft which delineates revisions it plans to make to the 'Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria', dated June 23, 2014. Fitch has reviewed transactions under both the existing and proposed criteria.
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 buildup of credit enhancement driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
See the full list of affected deals in the accompanying Rating Action Report, available at www.fitchratings.com, or by clicking on the link below.
Additional information is available at www.fitchratings.com.
Fitch Places 238 FFELP ABS Tranches on Rating Watch Negative
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 14 May 2014)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)
Exposure Draft: Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria (pub. 04 Dec 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria (pub. 23 Jun 2014)