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Global Credit Research - 02 Apr 2012
New York, April 02, 2012 -- Moody's Investors Service has published its methodology for rating
securities backed by student loans made under the Federal Family Education
Loan Program (FFELP) issued in the United States. The methodology
incorporates comments Moody's received from industry participants
after requesting comments on a proposed methodology issued January 18,
The published methodology mainly differs from the one Moody's proposed
in that it includes some additional basis risk cash flow assumptions for
one-month LIBOR indexed loans, to reflect recently enacted
legislation that allows holders of FFELP student loans to change the interest
rate index on their loans. The published methodology also differs
from the proposed one in how it applies cumulative defaults in its cash
flow analysis. Moody's has adjusted the default timing curve
assumption to reflect that the curve will be applied to a different loan
balance than originally proposed.
On December 23, 2011, President Obama signed legislation allowing
holders of FFELP student loans to change the interest rate index for the
loans they own to an index tied to one-month LIBOR, from
one tied to three-month commercial paper, starting on April
1, 2012. For securitizations with bonds indexed to LIBOR,
which are the majority of FFELP securitizations, changing the loan
index to LIBOR reduces basis risk, that is the risk that there will
be a mismatch between the interest on the loans and the interest being
paid out on the bonds issued by the securitization. For securitizations
that issue taxable auction rate securities with a cap based on the Treasury
bill rate, changing the loan index will be credit neutral.
For securitizations that issue taxable auction rate securities with a
cap based on the three-month commercial paper rate, changing
the index will be credit negative because it increases basis risk.
Moody's now expects the final methodology to lead to rating actions
on 194 tranches of notes with an outstanding amount of $7.5
billion. Moody's is issuing additional press releases to
announce these actions.
Called "Moody's Approach to Rating Securities Backed by FFELP
Student Loans," the revised methodology updates key cash flow
assumptions the rating agency uses to model the risk in FFELP student
loan securitizations, including cumulative default rates,
voluntary prepayment rates, interest rates, and net reject
rates. It is available on Moodys.com.
For more information on the cash flow assumptions added to the methodology
and changes to the default timing curve, please see the companion
report "Addition of assumptions for one-month LIBOR indexed
loans a key change to our FFELP methodology," also available
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Asst Vice President - Analyst
Structured Finance Group
Moody's FIS Domestic Sales Office - San Francisco CA
One Sansome St. Suite 3100
San Francisco, CA 94104
Barbara A. Lambotte
VP - Senior Credit Officer
Structured Finance Group
Moody's publishes methodology for FFELP student loans
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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