Approximately $190 million of asset-backed securities rated
New York, August 10, 2010 -- Moody's Investors Service has assigned definitive long-term ratings
of Aaa (sf) to the series 2010A-1 notes issued by Federated Student
Finance Corporation pursuant to an Amended and Restated Indenture of Trust
dated as of August 1, 2010.
The underlying collateral is guaranteed by the federal government through
the Federal Family Education Loan Program (FFELP). FFELP loans
are insured by the U.S. Department of Education for at least
97% of principal and accrued interest.
The complete rating actions are as follows:
Issuer: Federated Student Finance Corporation
$189,900,000 Series 2010A-1 (Class A) Student
Loan Asset-Backed Notes, rated Aaa (sf)
RATING 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; the initial parity ratio (assets/Class A notes)
of 104%; excess spread that is expected to average 55 to 75
basis points per annum; structural features that trap excess spread
and use it to pay down the notes in full prior to any releases to the
issuer; and a reserve account which is fully funded in the amount
of approximately $1.9 million and is available to cover
shortfalls in interest on the Class A notes and principal at maturity.
The expected net loss for this transaction is 0.16%.
REFUNDING AUCTION RATE SECURITIES
The proceeds of the Class A notes and 2010C-1 (Class C) notes will
be used to make a deposit into an escrow account to refund on the next
redemption date all of the existing auction rate securities outstanding
under an existing Amended and Restated Indenture of Trust dated as of
June 1, 2006 (the Existing Indenture). The Class C notes
will not receive any payments of interest or principal until after the
Class A notes have been paid in full. After the refunding,
the only notes issued under the indenture will be the Class A notes and
Class C notes, and no additional notes or other obligations will
be issued out of the trust after the closing date.
In accordance with the deal documentation, Federated Student Finance
Corporation (the Corporation) requested that Moody's provide its opinion
to the Corporation as to whether the ratings on the bonds issued under
the Existing Indenture would be downgraded or withdrawn as a result of
the issuance of the Class A and Class C notes, pursuance to the
Amended and Restated Indenture of Trust dated August 1, 2010.
Moody's has determined that the issuance of the Class A and Class C notes,
in and of itself , will not result in the downgrade or withdrawal
of the debt ratings currently assigned to any bond issued under the Existing
Indenture, as these bonds will be defeased. However,
Moody's opinion addresses only the credit impact associated with the issuance
of the notes, and Moody's is not expressing any opinion as
to whether these actions have, or could have, other non-credit
related effects that may have a detrimental impact on the interests of
note holders or counterparties.
V SCORE
The transaction's V Score is Medium, which is consistent with the
V Score of Medium assigned to 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
more than 99% of the loans generate a CP based return to the trust,
while the bonds' 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).
PARAMETER SENSITIVITIES
For the transaction, if the basis risk in our Aaa stressed assumptions
were to increase by 5, 15 or 25 basis points, the model output
for the Class A Notes would change from Aaa to Aa1, Aa1 ,
and Aa2, respectively.
Parameter Sensitivities are not intended to measure how the rating of
a 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 model output of each scenario. 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
model output presented in the Parameter Sensitivity analysis.
The methodology that was used in rating this transaction can be found
under Rating Methodology at the end of this press release. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
BASIS RISK
Basis risk is the primary credit risk in FFELP student loan ABS.
We expect that over the life of the transaction, the spread between
3 month LIBOR-paying bonds and 3 month CP-yielding assets
will be 0.10% with a one-time spike of 0.75%.
Moody's Aaa stressed basis risk assumption between three-month
LIBOR and the CP Rate is 25 basis points with certain periods in which
the spread increases to 150 basis points. This is based on an analysis
of historical spreads between the two indices. For additional information,
please see "Methodology Update on Basis Risk in FFELP Student Loan-Backed
Securitizations," on moodys.com.
RATING METHODOLOGY
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
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.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
A pre-sale report 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.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck.
New York
Barbara A. Lambotte
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Corey Henry
Asst Vice President - Analyst
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
USA
Moody's assigns rating of Aaa (sf) to Federated Student Finance Corporation Student Loan Asset-Backed Notes
