MOODY'S RATES TERI FINANCIAL SERVICES, INC. FIRST ALTERNATIVE STUDENT LOAN DEAL Aaa
Moody's Investors Service assigned ratings of Aaa to the Senior Series 1999A and an A2 to the Subordinate Series 1999B Student Loan Revenue Bonds, Select Auction Variable Rate Securities issued by TERI Financial Services, Inc.
The complete rating actions are summarized as follows:
$45,180,000 Student Loan Revenue Bonds, Select Auction Variable Rate Securities, Senior Series 1999A, rated Aaa
$16,180,000 Student Loan Revenue Bonds, Select Auction Variable Rate Securities, Subordinate Series 1999B, rated A2
Moody's Vice President, Sharon Asch, said that the ratings are based on several factors, including: (1) the 100% guarantee from Baa3-rated The Education Resources Institute, Inc. ("TERI") of principal (including capitalized interest if any) plus accrued interest on any defaulted student loan underlying the transaction, (2) the availability of a non-declining reserve fund as credit enhancement and liquidity support equal to 1.15% of the original loan balance, (3) the credit quality of the identified portfolio which consists of performing and re-performing loans, or previously defaulted loans that are currently performing, guaranteed by TERI, (4) the high amount of excess spread generated from a large percentage of Prime based assets, and (5) the quality of the Pennsylvania Higher Education Assistance Agency (PHEAA) and AFSA Data Corporation, as servicers. The Aaa ratings of the Senior Series 1999A securities are also based on the 26% subordination of the Subordinate Series 1999B securities.
This is the first transaction by TERI Financial Services, Inc. and the first student loan backed transaction rated by Moody's that entirely consists of alternative student loans and which does not have bond insurance. Typically, transactions that have had portfolios of all alternative loans have required bond insurance to achieve a Aaa rating. If bond insurance is not present, the portfolios normally would be comprised of a mix of alternative and FFELP loans with the FFELP loans providing extra credit enhancement for the higher loss severity expected for the alternative loans. Another unique feature of this transaction is the presence of rehabilitated, or re-performing, student loans which comprise approximately 37% of the total portfolio.
The proceeds of the bonds will be used to refinance the acquisition of two portfolios of loans, to fund the debt service reserve fund, and to pay certain costs of issuance. Additional bonds may be issued out of the same indenture in the future with Moody's rating confirmation of existing bonds. As is typical in most student loan backed transactions, this transaction will start under parity with the initial balance of the trust's assets equal to approximately 98.5% of the balance of the Series 1999 bonds. Excess interest and principal is expected to be used to accelerate the bonds sequentially until the bond principal balance equals the pool principal balance. Once the transaction reaches parity, all excess cash may be released to the issuer.
The transaction's debt service reserve fund is equal to 1.15% of the original loan balance. The reserve fund is non-declining and benefits the transaction by providing a growing percentage of credit enhancement as bonds pay down. Most student loan transactions have a debt service reserve fund equal to a fixed percentage of the outstanding bond balance subject to a floor. Although most student loan borrowers default in the early years of repayment, a non-declining reserve adds additional credit and liquidity protection to the transaction for defaults that may occur at the back end.
At, closing approximately $59.8 million of bond proceeds will be deposited into the acquisition account. The amounts in the acquisition account will be used immediately to purchase two portfolios of loans. The pool will consist of the performing loans, in the current aggregate principal amount of approximately $37 million , and the re-performing loans, in the current aggregate principal amount of approximately $23 million. Both portfolios of loans were not originated under the Higher Education Act and are not reinsured by the Department of Education. The loans, however, are fully guaranteed by TERI for defaulted principal and accrued interest. The reimbursements are therefore dependent on the reserves and resources of TERI (rated Baa3 by Moody's).
The performing loans are loans which were purchased by the corporation from a group of financial institutions which originated or acquired such loans, and as to which TERI has not been required to pay on its loan guaranty. The re-performing loans are loans which have previously been in default and with respect to which the TERI guaranty was called on. These loans have since been returned to current status and were purchased by the corporation from TERI.
The performing loans are very strong in terms of school type and payment status. Approximately 75% of the loans are made predominately to borrowers attending four year undergraduate schools. Based on historical information, these loans have a much lower projected default frequency than FFELP loans because of a co-signer and other stringent underwriting criteria. However, they were assessed to have a higher loss severity based on the relatively weak guarantee provided by TERI, rated Baa3, as compared with FFELP loans which are ultimately guaranteed by the Department of Education, rated Aaa. The other 25% of the portfolio consist of loans made to graduate students which default at a slightly higher frequency that the undergraduate loans. Approximately 96% of the portfolio is in active repayment which greatly reduces liquidity risk.
The re-performing loans consist mostly of graduate loans originated under the TERI Professional Education Plan loan program and the Access Group loan program. The borrowers have defaulted once before but have been returned to current status by making three consecutive on-time payments. Based on limited historical information, it is projected that these borrowers will default at a higher frequency than performing loans and that the defaults will be more front-loaded than typical student loans.
TERI Financial Services, Inc. is a Massachusetts not-for-profit corporation, exempt from income taxation under Section 501 (c)(3) of the Internal Revenue Code. It was incorporated in 1994 as a not-for-profit affiliate of TERI with common directors and officers. The corporation has no employees and is managed and operated by TERI staff pursuant to a management services agreement. TERI Financial Services, Inc. was created for the purpose of supporting and carrying out the charitable and educational purposes of TERI, through, among other things, the creation of a secondary market in student education loans.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY'S CREDIT RATINGS,
ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
MOODY'S CREDIT RATINGS,
ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com
under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.