Fitch places student loan trusts on ‘Rating Watch Negative’
by MBJ Staff
Published: September 28,2011
JACKSON — Fitch Ratings has placed 16 U.S. student loan ABS trusts on “Rating Watch Negative.” The action includes the Mississippi Higher Education Assistance Corp.-1999 Trust Indenture and Mississippi Higher Education Assistance Corp.-2004 Indenture of Trust.
In taking the actions, Fitch has cast a wide net selecting trusts that contain more than 20 percent tax-exempt auction rate securities (ARS) and have a pool factor greater than 10 percent.
Fitch wrote: “The trusts are being reviewed at this time due to the prominence of a unique multiplier function and its determination based on lowest rating assigned to the notes by any rating agency. This feature, in conjunction with recent actions taken by other agencies as well as parity being sustained only voluntarily in some cases at levels substantially in excess of cash release levels, has led Fitch to reevaluate the risk in these transactions. Fitch notes that the analysis will focus upon structural issues and that there is not additional perceived credit risk associated with the collateral, which is comprised of FFELP student loans for most trusts.
“Fitch will conduct a detailed review of each of the trusts placed on ‘Rating Watch Negative’ over the next two to three months. Although these trusts are currently benefiting from the low interest rate environment, the review will consist of running various interest rate stresses against these transactions, coupled with the current and maximum multiplier function values to evaluate the long term risk. Rating actions as a result of the review are expected to include both affirmations and downgrades. Downgrades will vary, but some could be several categories in severity. Mitigating factors could include current parity level, minimum parity level for cash release, current pool factor, trust liability and collateral composition, amongst others.
“Since the failure of the auction rate securities market in 2008, the maximum auction rate (MAR) has been in effect for these transactions. The MAR includes a multiplier or applicable percentage which increases depending on the rating. Typically, the applicable percentage is between 150 percent-175 percent of the linked index for ratings ‘A’ or better and 200 percent – 265 percent of the linked index for ratings less than ‘A’. The applicable percentage is based on the lowest rating on the bonds. If a bond’s applicable percentage increases from 175% to 265% due to a downgrade, the bond’s coupon will increase by about 50% (unless it hits the cap), which will compress excess spread and possibly erode parity.”
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