NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on SLM Student Loan Trust 2004-10 (SLM 2004-10):
--Class A-5A 'AAAsf' placed on Rating Watch Negative;
--Class A-5B 'AAAsf' placed on Rating Watch Negative;
--Class A-6A 'AAAsf' placed on Rating Watch Negative;
--Class A-6B 'AAAsf' placed on Rating Watch Negative;
--Class A-7A 'AAAsf' maintained on Rating Watch Negative;
--Class A-7B 'AAAsf' maintained on Rating Watch Negative;
--Class A-8 'AAAsf' maintained on Rating Watch Negative;
--Class B 'BBBsf' placed on Rating Watch Negative.
The class A-8 note is Euro-denominated. At issuance, a currency swap agreement was entered into by the trust to mitigate foreign exchange exposure risk arising from the mismatch between U.S. dollar assets of the trust and the Eurodollar liabilities of class A-8. The swap counterparty's Issuer Default Rating is now below the minimum threshold specified in Fitch's counterparty criteria. Fitch is currently in the process of examining the sufficiency of arrangements for collateralization of the swap.
In the event of the swap termination, the trust will be exposed to exchange rate risk between the U.S. Dollar and the Euro. A significant increase in the A-8 interest payment, caused by a depreciating dollar, could reduce the collection funds available for interest and principal payments, resulting in an increased risk of default for all outstanding bonds.
Additionally, the placement of the A-7, A-8 and B notes on Negative Watch is due to their inability to pass cash flow stresses necessary to maintain their current ratings. On Dec. 4, 2015, Fitch released an exposure draft that delineates revisions it plans to make to the 'Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria', dated June 23, 2014. This transaction was reviewed under both the existing criteria and exposure draft.
Fitch expects to resolve the Rating Watch Negative status once its revised FFELP criteria report is published and further review of the collateral information posted by AIG Financial Products Corporation is completed.
KEY RATING DRIVERS
Collateral Quality: The trust collateral consists of 100% of 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. Fitch currently rates the U.S. 'AAA' with a Stable Outlook.
Credit Enhancement: While both senior and subordinate notes will benefit from future excess spread, the senior notes also benefit from subordination provided by the class B notes. As of March 2016, total parity is 100.00% and senior parity is 104.60% (4.40% CE). Cash is being released from the trust given that the 100% total parity is maintained.
Liquidity Support: Liquidity support is provided by a reserve account. The reserve is sized equal to the greater of 0.25% of the pool balance, and $5,850,157.
Servicing Capabilities: Navient Solutions, Inc. (FKA Sallie Mae, Inc.) is responsible for the day to day servicing of the student loans. Fitch believes Navient Solutions to be an acceptable servicer of FFELP student loans.
In December 2015, Fitch released an exposure draft that 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.
On June 9, 2016, Fitch published a press release titled 'Fitch Finalizing Changes to FFELP Student Loan ABS Criteria' that details likely changes to the final criteria report, which it expects to publish in less than 60 days.
In certain LIBOR-down interest rate stress scenarios the basis spread may be compressed, as Fitch would apply a floor to one-month LIBOR at a negative rate level in accordance with Fitch's 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (May 2016). Since the updated interest rate stresses are not addressed yet in existing FFELP criteria, this represents a criteria variation. Use of the criteria variation did not have a measurable impact upon the ratings assigned.
Under the 'Counterparty Criteria for Structured Finance and Covered Bonds', dated May 14, 2014, 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. Since the only available funds to invest in are those held in the Collection Account, and the funds can only be invested for a short duration of three months given the payment frequency of the notes, Fitch doesn't believe such variation has a measurable impact upon the ratings assigned.
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 CE 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.
Additional information is available at www.fitchratings.com.
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. 17 May 2016)
Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 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)