Approximately $268.3 million of asset-backed securities affected
New York, March 29, 2011 -- Moody's Investors Service has assigned a definitive rating of Aaa (sf)
to the Class A Notes 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 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)
overcollateralization equal to 3.66% and (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 are 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 Trust 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 has assigned a definitive rating of Aaa (sf) to the Class A Notes issued by Scholar Funding Trust 2011-A
