Approximately $1.6 billion of asset-backed securities affected
New York, March 28, 2011 -- Moody's Investors Service has assigned provisional ratings of (P)Aaa to
the Class A notes and (P)Aa3 to the Class B notes to be issued by Educational
Funding of the South, Inc. 2011-1 Series. The
underlying collateral will consist of Federal Family Education Loan Program
(FFELP) student loans.
Moody's issues provisional ratings in advance of the final sale of securities.
Upon a conclusive review of the final documentation, Moody's will
endeavor to assign final ratings to the securities. Final ratings
may differ from provisional ratings.
The complete rating actions are as follows:
Issuer: Educational Funding of the South, Inc.
Class A-1 Notes, assigned (P)Aaa
Class A-2 Notes, assigned (P)Aaa
Class B Notes, assigned (P)Aa3
The ratings are based on (1) 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; (2) credit support provided by the overcollateralization
of the trust, which is expected to have an initial parity level
of approximately 102.5%, and the average excess spread
of the transaction, which is expected to be positive at approximately
20 basis points per annum; (3) liquidity support provided by a debt
service reserve fund and a capitalized interest fund, which are
expected to be fully funded at closing at 0.50% of the initial
note balance and $14.8 million, respectively;
and (4) the expertise and experience of Edfinancial Services, LLC
(Edfinancial), Great Lakes Educational Loan Services, Inc.
(SQ1 for FFELP loans), The Student Loan Corporation, and Pennsylvania
Higher Education Assistance Agency (PHEAA) as servicers of the trust student
loans. PHEAA will be the named back-up servicer for Edfinancial.
At closing, Edfinancial is expected to service approximately 77%
of the trust student loans. The Class A notes are further expected
to benefit from the 4.3% subordination provided by the Class
B notes, which is expected to increase over time. The expected
net loss for the student loan pool to be securitized is 0.27%.
V SCORE AND PARAMETER SENSITIVITIES
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. The primary driver of the "Medium"
V Score is the volatility that is introduced by basis risk, which
is unhedged. The basis risk in this transaction exists because
all of the loans generate a CP-based return to the trust,
while the bond interest rate is indexed to LIBOR.
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).
For the transaction, if the basis risk in our stressed assumptions
were to be changed to +15, +25 or +40 basis points,
the initial model-indicated output for the Class A notes would
be Aaa, Aaa, and Aa1 respectively. If the basis risk
in our stressed assumptions were to be changed to +5, +15
or +25 basis points, the initial model-indicated output
for the Class B notes would be A1, A2, and Baa1 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
The methodology that was used in rating this transaction is described
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.
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
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 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 three 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,
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.
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.
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.
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.
Barbara A. Lambotte
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns provisional ratings of (P)Aaa to the Class A notes and (P)Aa3 to the Class B notes to be issued by Educational Funding of the South, Inc. 2011-1 Series
250 Greenwich Street
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