NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Nelnet Student Loan Trust 2005-4 (Nelnet 2005-4):
--Class A-3 notes affirmed at 'AAAsf'; Outlook Stable;
--Class A-4L downgraded to 'BBsf' from 'AAAsf'; Outlook Stable;
--Class A-4AR-1 downgraded to 'BBsf' from 'AAAsf'; Outlook Stable;
--Class A-4AR-2 downgraded to 'BBsf' from 'AAAsf'; Outlook Stable;
--Class B downgraded to 'BBsf' from 'Asf'; Outlook Stable.
All classes have been removed from Rating Watch Negative.
The decision to downgrade the class A-4L, A-4AR-1, A-4AR-2 and B notes to 'BBsf' rather than 'CCCsf' or below is a criteria variation. The class A-4 notes miss the credit and maturity stress base case scenarios by 0.25-1.00 years. Fitch has considered qualitative factors such as Nelnet's ability to call the notes upon reaching 10% pool factor, the long time horizon until the A-4 and B maturity dates, and the class A-4 under the base case scenarios miss the legal final maturity date within a year's timeframe with the maturity date still being over 15 years away.
The class A-4L, A-4AR-1 and A-4AR-2 notes hit an event of default under the base cases, class B suffers an interest shortfall, as all class B interest post-EOD is diverted to pay class A principal. As a result, the class B notes fail the base cases as well. The post-EOD waterfall run is the primary scenario, given that the pre-EOD waterfall will not take into account the class B interest disruption.
KEY RATING DRIVERS
U.S. Sovereign Risk: The trust collateral comprises 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. Fitch's U.S. sovereign rating is currently 'AAA'/Outlook Stable.
Collateral Performance: Fitch assumes a base case default rate of 15.75% and a 47.00% default rate under the 'AAAsf' credit stress scenario. The base case default assumption of 15.75% implies a constant default rate of 3% (assuming a weighted average life of 15.6 years) consistent with the trailing 12 month (TTM) average constant default rate utilized in the maturity stresses. Fitch applies the standard default timing curve. The claim reject rate is assumed to be 0.25% in the base case and 2% in the 'AAAsf' case.
The trailing 12 month average of deferment, forbearance, Income-based repayment (prior to adjustment) and constant prepayment rate (voluntary and involuntary) are 5.4%, 7%, 12% and 8.8%, respectively, which are used as the starting point in cash flow modeling. Subsequent declines or increases are modeled as per criteria. The borrower benefit is assumed to be approximately 0.20%, 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: 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, effective senior and total parity is 105.51% (5.22% CE) and 100.57% (0.57% CE). Liquidity support for the 2005-4 notes is provided by a Reserve Account which is at $2,841,887.45 with a floor of $2,841,887.45. Cash is being released from the trust given that $1.1 million of OC (excluding the reserve, as pool factor is below 40%) is maintained.
Maturity Risk: Fitch's student loan ABS cash flow model indicates that the class A-3 notes are paid in full on or prior to the legal final maturity dates under the 'AAA' stress scenarios. The A-4 notes do not pay off before their maturity date in Fitch's modelling scenarios, including the base cases. If the breach of the class A-4 maturity date triggers an event of default, interest payments will be diverted away from the class B notes, causing them to fail the base cases as well.
Operational Capabilities: Day to day servicing is provided by Nelnet and ACS. Fitch believes both are acceptable at this time due to its long servicing history.
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.
The decision to downgrade the A-4L, A-4AR-1, A-4AR-2 and B notes to 'BBsf' rather than 'CCCsf' or below is a criteria variation. Fitch has considered qualitative factors such as Nelnet's ability to call the notes upon reaching 10% pool factor, the long time horizon until the A-4 and B maturity dates, and the eventual full payment of principal in modelling in its analysis to support this decision.
'AAAsf' rated tranches of most FFELP securitizations will likely move in tandem with the U.S. sovereign rating, given the strong linkage to the U.S. sovereign by nature of the reinsurance and SAP provided by ED. Sovereign risks are not addressed in Fitch's sensitivity analysis.
Fitch conducted a CE sensitivity analysis by stressing both the related lifetime default rate and basis spread assumptions. In addition, Fitch conducted a maturity sensitivity analysis by running different assumptions for the IBR usage and prepayment rate. The results below should only be considered as one potential model implied outcome as the transaction is exposed to multiple risk factors that are all dynamic variables.
Credit Stress Rating Sensitivity
--Default increase 25%: class A 'CCCsf'; class B 'CCCsf'
--Default increase 50%: class A 'CCCsf'; class B 'CCCsf'
--Basis Spread increase 0.25%: class A 'CCCsf'; class B 'CCCsf'
--Basis Spread increase 0.50%: class A 'CCCsf'; class B 'CCCsf'
Maturity Stress Rating Sensitivity
--CPR decrease 50%: class A 'CCCsf'; class B 'CCCsf'
--CPR increase 100%: class A 'Asf'; class B 'Asf'
--IBR Usage increase 100%: class A 'CCCsf'; class B 'CCCsf'
--IBR Usage decrease 50%: class A 'CCCsf'; class B 'CCCsf'
Stresses are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration in trust performance. Rating sensitivity should not be used as an indicator of future rating performance.
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. 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. 10 Nov 2016)
Dodd-Frank Rating Information Disclosure Form
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