Fitch Takes Various Actions on Two SLM 2004 Trusts

NEW YORK--()--Fitch Ratings has taken the following rating actions on two SLM 2004 trusts:

SLM Student Loan Trust 2004-3 (SLM 2004-3):

--Class A-5 affirmed at 'AAAsf'; Outlook Stable;

--Class A-6A affirmed at 'AAAsf'; removed from Rating Watch Negative and assigned Outlook Stable;

--Class A-6B affirmed at 'AAAsf'; removed from Rating Watch Negative and assigned Outlook Stable;

--Class B affirmed at 'Asf'; removed from Rating Watch Negative and assigned Outlook Stable.

SLM Student Loan Trust 2004-8 (SLM 2004-8):

--Class A-5 affirmed at 'AAAsf'; Outlook Stable;

--Class A-6 downgraded to 'AAsf' from 'AAAsf'; removed from Rating Watch Negative and assigned Outlook Stable;

--Class B affirmed at 'BBBsf'; Outlook Stable.

The affirmations above are due to the notes passing both Fitch's credit and maturity stresses at the commensurate rating level. The downgrade of the SLM 2004-8 class A-6 notes results from the notes failing Fitch's 'AAAsf' maturity stresses, experiencing a small principal shortfall in the cash flow analysis.

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 by Fitch.

Collateral Performance for SLM 2004-3: Fitch assumes a base case default rate of 12% and a 35.8% default rate under the 'AAA' credit stress scenario. The claim reject rate is assumed to be 0.50% in the base case and 3% in the 'AAA' case. Fitch applies the standard default timing curve in its credit stress cash flow analysis. The trailing 12 month (TTM) average constant default rate, utilized in the maturity stresses, is 2%. TTM levels of deferment, forbearance, Income-based repayment (prior to adjustment) and constant prepayment rate (voluntary and involuntary) are 5.1%, 8.2%, 10.2% and 7.3%, 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 0.24%, based on information provided by the sponsor.

Collateral Performance for SLM 2004-8: Fitch assumes a base case default rate of 13.8% and a 41.5% default rate under the AAA credit stress scenario. The claim reject rate is assumed to be 0.50% in the base case and 3% in the 'AAA' case. Fitch applies the standard default timing curve in its credit stress cash flow analysis. The TTM average constant default rate, utilized in the maturity stresses, is 2.7%. TTM levels of deferment, forbearance, Income-based repayment (prior to adjustment) and constant prepayment rate (voluntary and involuntary) are 5.8%, 9.0%, 8.7% and 7.8%, 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 0.22%, 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 (CE) is provided by excess spread and, for the class A notes, subordination. As of July 2016, respective total and senior effective parity ratios (including the reserve) are 100.41% (0.40% CE) and 105.20% (4.95% CE) for SLM 2004-3; 100.42% (0.42% CE) and 105.59% (5.29% CE) for SLM 2004-8. Liquidity support is provided by reserve accounts sized at $4,509,772 for SLM 2004-3 and $3,314,921 for SLM 2004-8. Cash will continue to be released as long as the target parity ratio of 100% (excluding the reserve, as pool factors are below 40%) for both transactions are maintained.

Maturity Risk: Fitch's SLABS cash flow model indicates that the notes are paid in full on or prior to the legal final maturity dates under the commensurate rating scenario.

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

For transactions in surveillance, Fitch will treat certain assets such as claims filed as short-term assets in its cash flow analysis. Given that Fitch's current criteria is silent on the treatment of such assets, this treatment is considered a criteria variation.

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. 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 does not believe such variation has a measurable impact upon the ratings assigned.

RATING SENSITIVITIES

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.

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. 18 Jul 2016)

https://www.fitchratings.com/site/re/884963

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/site/re/879815

Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 Dec 2015)

https://www.fitchratings.com/site/re/875586

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010934

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010934

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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

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