NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken various rating actions on the following classes of Nelnet Student Loan Trust 2014-4:
--Class A-1 affirmed at 'AAAsf'; Outlook Stable;
--Class A-2 affirmed at 'AAAsf'; Removed from Rating Watch Negative and assigned a Stable Rating Outlook;
--Class B upgraded to 'AAsf' from 'Asf+'; Outlook revised to Stable from Positive.
Although cash flows indicated a higher rating, Fitch upgraded the class B notes to 'AAsf' based on low hard credit enhancement leading to strong dependency on excess spread.
KEY RATING DRIVERS
U.S. Sovereign Risk: The trust collateral comprises Federal Family Education Loan Program (FFELP) loans including approximately 21% of rehabilitated 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 rated 'AAA', Outlook Stable by Fitch.
Collateral Performance: Fitch assumes a base case of 14.25% for the non-rehab loans and 42.50% for the rehab loans, resulting in a weighted average base case default rate of approximately 20.1% and 54.6% under the 'AAA' credit stress scenario. The claim reject rate is assumed to be 0.25% in the base case and 2.0% in the 'AAA' case. Fitch applies the standard default timing curve, in its credit cash flow analysis. Trailing 12 month (TTM) average constant default rate, utilized in the maturity stresses, is 6.6%. The TTM average of deferment, forbearance, income based repayment (before adjustment) and constant prepayment rate (voluntary and involuntary) are 9.9%, 18.0%, 17.3% and 11.9%, 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 0.15%, 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: Cash flow scenarios for the 2014-4 notes were satisfactory under 'AAAsf' stress using Fitch's Student Loans ABS cash flow model (SLABS). Total credit enhancement (CE) is provided by overcollateralization and excess spread and the class A notes benefit from subordination provided by the class B note. As of the August 2016 distribution report, senior and total parity is 104.68% and 101.27%. Liquidity support for the 2014-4 notes is provided by a Reserve Account which is at $3,675,042.59 with a floor of $384,500. The trust is releasing cash.
Maturity Risk: Fitch's SLABS cash flow model indicates that all notes are paid in full on or prior to their legal final maturity of Nov. 25, 2034 for the class A-1 note, Nov. 25, 2043 for the class A-2 note and Jan. 25, 2047 for the class B note.
Acceptable Servicing Capabilities: Day to day servicing is provided by Nelnet, Pennsylvania Higher Education Assistance Agency (PHEAA), and Xerox-ES. Fitch believes all servicers are acceptable at this time due to its long servicing history.
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. Fitch does not believe such variation has a measurable impact upon the ratings assigned.
Under the 'Counterparty Criteria for Structured Finance and Covered Bonds', dated Sept. 1, 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 are those held in the Collection Account, and the funds can only be invested for a short duration given the payment frequency of the notes, Fitch does not 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 build-up 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.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria (pub. 26 Jul 2016)
Dodd-Frank Rating Information Disclosure Form