NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the senior notes issued by Indiana Secondary Market for Education Loans, Series 2014 at 'AAAsf'. The Rating Outlook remains Stable.
--Class A at 'AAAsf'; Outlook Stable.
KEY RATING DRIVERS
U.S. Sovereign Risk: The trust collateral consists of 100% 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.
Collateral Performance: Fitch assumes a base case default rate of 34.7% and a 100.0% default rate 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 stress cash flow analysis. The trailing 12-month (TTM) constant default rate, used in the maturity stress is 6.3%. The TTM levels of deferment, forbearance, income-based repayment (before adjustment) and constant prepayment rate (voluntary and involuntary) are 8.7%, 13.8%, 30.0%, and 12.1%, respectively, and 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 0.29% for interest rate reductions based on information provided by the issuer.
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 overcollateralization and excess spread. As of the September 2016 distribution report, parity is 104.2% (4.1% CE). Liquidity support is provided by a debt service reserve fund sized at the greater of 0.50% of the current pool balance and $250,000. The current debt service reserve fund balance is approximately $599,669.
Maturity Risk: Fitch's SLABS cash flow model indicates that the ISM 2014 notes are paid in full on or prior to their respective legal final maturity in Fitch's 'AAA' credit and maturity stresses.
Operational Capabilities: The ISM 2014 portfolio is serviced by American Education Services (AES), a servicing division of the Pennsylvania Higher Education Assistance Agency(PHEAA); Xerox Education Services, LLC (Xerox-ES); and Great Lakes Educational Loan Services. All servicers are acceptable servicers of FFELP student loans.
Under Fitch's criteria "Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria" dated July 26, 2016, Fitch does not address the process by which it gives certain credit to short-term assets in its cash flow analysis, and it is therefore considered a criteria variation.
Under Fitch's criteria, 'Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria', dated July 26, 2016, Fitch utilizes its default model to derive lifetime default rate assumptions. Fitch assumed a base case default rate for the credit stresses based on actual trust performance, which is higher than the output from its default model, and is therefore considered a criteria variation. Had the Default Model been used as the base case, the implied rating for the class A note would have been the same.
Since FFELP student loan ABS rely 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 and basis risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults and basis shock beyond Fitch's published stresses could result in future downgrades. Likewise, a build-up of credit enhancement driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.
DUE DILIGENCE USAGE
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to Fitch, 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. 26 Oct 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)
Indiana Secondary Market for Education Loans, Inc., Series 2014 -- Appendix
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