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Rating Action:

Moody's Investors Service assigned provisional rating to the Class A Notes issued by Scholar Funding Trust 2011-A

17 Mar 2011

$268.3 million of asset-backed securities affected

New York, March 17, 2011 -- Moody's Investors Service has assigned a provisional rating of (P)Aaa (sf) to the Class A Notes to be issued by Scholar Funding Trust 2011-A. This securitization is backed by approximately 81% rehabilitated Federal Family Education Loan Program (FFELP) student loans and approximately 19% non-rehabilitated FFELP student loans.

Issuer: Scholar Funding Trust 2011-A

$268,300,000 Class A Notes, Rated (P)Aaa (sf)

RATINGS RATIONALE

The ratings are based on the underlying collateral which consists of FFELP student loans, which are indirectly guaranteed by the U.S. Department of Education for a minimum of 97% of defaulted principal and accrued interest; available credit enhancement provided by (1) expected overcollateralization of the trust, (2) average gross excess spread expected to equal approximately 0.34% per annum, and (3) liquidity support provided by a capitalized interest account and a debt service reserve account, which is expected to be fully funded at closing in an amount equal to $4,000,000 and 0.25% of the initial pool balance, respectively.

We expect rehabilitated FFELP loan pools to experience a higher net loss rate compared with pools of non-rehabilitated FFELP loans because although the rehabilitated loans benefit from the same degree of federal guarantee, they are expected to default at a significantly higher rate than non-rehabilitated loans. The expected net loss on the rehabilitated FFELP loan pool to be securitized is approximately 1.2% compared to non-rehabilitated FFELP loan pool to be securitized, which is expected to be approximately 0.2%. The expected net loss for the entire combined pool is approximately 1%.

The V Score for this transaction is Medium, which is in line with the Medium V Score assigned for the U.S. FFELP-Backed LIBOR-Indexed ABS sector. In the subcategory of "Issuer/Sponsor/Originator's Historical Performance Variability" we assess this transaction's score to be Low/Medium, one notch higher than the sector's Low score. As discussed above, we expect rehabilitated FFELP student loan pools to experience a higher net loss rate compared with pools of non-rehabilitated FFELP loans. In addition, we expect the credit performance of rehabilitated FFELP loans to be more variable than non-rehabilitated loans and to be more impacted by the economy.

Moody's V Scores provide a relative assessment of the quality of available credit information and the potential variability around the various inputs to a rating determination. The V Score ranks transactions by the potential for significant rating changes owing to uncertainty around the assumptions due to data quality, historical performance, the level of disclosure, transaction complexity, the modeling and the transaction governance that underlie the ratings. V Scores apply to the entire transaction (rather than individual tranches).

If the basis risk in our Aaa stressed assumptions were to increase by 5, 15 or 25 basis points, the initial model outputs for the Class A notes are Aa1, Aa2, and Aa3, respectively.

Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time; rather they are designed to provide a quantitative calculation of how the initial model output might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. Parameter Sensitivities only reflect the ratings impact of each scenario from a quantitative/model-indicated standpoint. Qualitative factors are also taken into consideration in the rating process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.

In rating securitizations backed by student loans originated under the Federal Family Educational Loan Program (FFELP), Moody's assesses both the liquidity and credit risk of the transaction. The drivers that affect the performance of a transaction include defaults, servicer guarantee rejection rates, voluntary prepayments, basis risk, borrower benefit utilization, and the number of borrowers in non-repayment status, such as deferment and forbearance.

As part of our analysis to understand the risk of the underlying collateral, we examine historical FFELP static pool performance data. To the extent that performance data is available from a specific issuer, that information is used to arrive at our cash flow assumptions for that particular issuer. If an issuer's data are either limited or unavailable, our assumptions are based on FFELP performance data received from other participants. Although FFELP loans are a standardized asset, we will assume additional volatility in certain assumptions for those issuers that have limited or no data.

In addition, historical interest rates and spreads are analyzed to evaluate the basis risk between the interest rate to which the bonds are indexed and the interest rate to which the FFELP loans are indexed. While a typical FFELP transaction is only subject to basis risk between three-month LIBOR and the 90-day CP rate, this transaction is also exposed to basis risk between three-month LIBOR and the 91-day T-Bill rate.

This historical data is used to derive an expected, or most likely, outcome for each variable. These expected defaults, prepayments, interest rates, and other assumptions are then stressed in accordance with the rating categories requested by the issuer. Factors that influence the stress levels include the availability of relevant issuer-specific performance data, the seasoning of the loans, collateral concentrations (school types, loan programs), the financial strength and stability of the servicer, and the general economic environment.

These stressed assumptions are then incorporated into a cash flow model that takes into account the FFELP loan characteristics as well as structural (e.g., starting parity, cash flow waterfall, bond tranching, etc.) and pricing features of the transaction. The cash flow model outputs are analyzed to determine whether the transaction as structured by the issuer has sufficient credit protection to pay off the bonds by their legal final maturity dates. We also analyze the liquidity risk of the transaction given that borrowers can be in non-repayment status while in school, grace, deferment or forbearance status, and the transaction can experience delays in default reimbursement and other payments.

On November 18, 2009, Moody's updated its methodology to incorporate an additional assessment of the risk posed by slow loan repayment rates when analyzing bonds that are backed by FFELP student loans. We have recently observed a considerable decline in actual repayment rates of securitized FFELP student loan pools across issuers. The risk posed by slow loan repayment rates is most pronounced for transactions with negative excess spread, which have become more common in the past two years. Under the updated methodology, the cash flows of the transaction must be sufficient to make full and timely payments to investors in a new repayment stress scenario in which the combination of voluntary prepayments, defaults, forbearance rates, and deferment rates results in a total repayment rate that is considerably lower than our existing stress scenarios. For more information, please see Moody's Rating Methodology, "Methodology Update: New Repayment Stress Scenario in FFELP Student Loan-Backed Securitizations," November 18, 2009.

Rehabilitated FFELP Student Loan Cash Flow Assumptions

To address the different performance expectation of rehabilitated FFELP student loans in our ratings, some of the cash flow assumptions used to analyze the transaction differ from those of non-rehabilitated FFELP loan transactions. We expect the cumulative gross default rate on rehabilitated FFELP student loan pools to range from 30% to 40%, which is about three to four times higher than that of non-rehabilitated FFELP loan pools. Therefore, we apply a significantly higher cumulative default rate of 75% in our Aaa scenarios. For a given level of cumulative defaults, the shifting of those defaults to earlier points in the life of the transaction can imply either more or less stress on a transaction, depending on the particular transaction structure. Therefore, in our Aaa scenarios, we separately analyzed the transaction with (A) a front-ended default timing curve (70% in year 1, 20% in year 2 and 10% in year 3) and (B) a back-ended curve (30% in year 1, 20% in year 2, 10% in years 3 through 5 and 5% in years 6 through 9). The high cumulative default rate and front-ended default curve are most stressful to the transaction since the positive excess spread generated is reduced.

We applied our standard FFELP net reject rate assumptions. We expect the net reject rate on claims submitted on defaulted rehabilitated FFELP loans by the servicer to the guarantor to be similar or lower than on non-rehabilitated FFELP loans. It may be lower because the rehabilitated loan has already been through two of the more common instances where servicer errors occur: (1) at the time of origination, in this case directly by the guarantor and (2) when the loan enters repayment. Additionally, because these loans default at a faster rate, there is less time during which the servicer may commit an error.

We applied our standard FFELP consolidation loan voluntary prepayment rate assumptions. We expect the voluntary prepayment rates of rehabilitated FFELP loans to be the same or lower relative to non-rehabilitated FFELP loans because we expect higher defaults, which reflects the lower credit quality of the borrowers.

All other assumptions, including deferment and forbearance utilization rates and basis risk, are the same as for non-rehabilitated FFELP transactions. None of the rehabilitated loans to be securitized earn borrower benefits since the benefits were lost when the loans first defaulted. Therefore, borrower benefit utilization rate assumptions are not applicable to the analysis of this transaction.

T-Bill -- LIBOR Basis Risk in FFELP Student Loan-Backed Securitizations

The most common form of basis risk in FFELP-backed student loan transactions is CP-based assets paired with LIBOR-based liabilities. The basis risk exists because all FFELP loans disbursed after 2000 generate a CP-based yield, while the bond interest rates are generally indexed to LIBOR. This CP-LIBOR risk is accounted for and stressed through Moody's interest rate cash flow assumptions which were updated on November 19, 2008 to account for the increased likelihood for the occurrence of spikes and higher spreads between these indices in the future.

Approximately 7% of the student loans in Scholar Funding 2011-A were disbursed prior to 2000 and generate a T-Bill based return to the trust. This creates a significant amount of basis risk between T-Bill and LIBOR. Due to the high level of T-Bill-LIBOR basis risk exposure, Moody's analyzed the historical relationship between T-Bill and LIBOR to determine the interest rate assumptions to use for this transaction.

Since 1971, the average spread between T-Bill and LIBOR has been 0.85%. During 2008, the average spread between LIBOR and T-Bill was 1.6%. Based on our analysis of the interest rate spread between T-Bill and LIBOR, Moody's has provided the following updated assumptions for a Aaa rating:

Three Month LIBOR Minus T-Bill

Spread Assumptions: Aaa -- 150 bps; Maturity -- 130 bps;

Spike Assumptions: Aaa -- 330 bps; Maturity -- None;

The interest rate spikes occur in months 6-12 of year 1 and year 5 and then for the first 6 months after the pool factor reaches 10%.

These assumptions were used to evaluate Scholar Funding 2011-A. Going forward, these assumptions may be used to evaluate trusts which have significant exposure to T-Bill-LIBOR basis risk. Moody's will disclose when these assumptions are used in place of the published assumptions.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments in this transaction.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Additional research, including a pre-sale report for this transaction is available at www.moodys.com. The special report "V Scores and Parameter Sensitivities in the U.S. Student Loan ABS Sector," is also available on moodys.com.

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.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Pedro Sancholuz Ruda
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Barbara A. Lambotte
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service assigned provisional rating to the Class A Notes issued by Scholar Funding Trust 2011-A
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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