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28 Aug 2008
Moody's downgrades K2 Financial, LLC student loan notes; review continues
Approximately $235.7 million of asset-backed securities affected
New York, August 28, 2008 -- Moody's Investors Service has downgraded five tranches from two
student loan master trusts from K2 Financial, LLC. The ratings
of two classes of notes remain under review for possible downgrade.
Three of the downgraded tranches were originally rated "A2"
and the remaining two tranches were originally rated "Aaa".
The notes were placed on review for possible downgrade on March 31,
The action is prompted by the increase in funding costs due to the prolonged
and continuing dislocation in the Student Loan Auction Rate Securities
(SLARS) market. Since February 2008 many auctions have failed.
As most student loan collateral is indexed to the Financial Commercial
Paper, LIBOR, or Prime rates, trusts that have issued
SLARS have suffered excess spread compression as the yield on the assets
has not increased in tandem with the cost of the liabilities. In
most structures, excess spread is a primary source of credit enhancement.
As the auction rate market remains under stress and auctions continue
to fail, the ability of the trusts that have issued SLARS to accumulate
credit enhancement has been negatively impacted.
Both the K2 Student Loan Trust I and the RTP Student Loan Trust II are
funded entirely with auction rate notes and are undercollateralized by
3.9% and 3.8% respectively as of June 30,
2008 at the subordinate notes level (i.e. Total Parity,
or the ratio of total assets to total liabilities is 96.1%
and 96.2%). Undercollateralization represents 32%
and 70% of the outstanding balance of the subordinate notes in
the K2 and RTP trusts respectively. The Senior Parity (defined
as the ratio of total assets to senior liabilities) for the K2 trust I
is 109.5% compared with 102% Senior Parity of the
RTP trust II.
At the failed auction rate, the excess spread for both trusts is
expected to be zero to slightly negative. Due to the trusts'
inability to build collateralization through excess spread, and
absent a restructuring of the trust liabilities, it is unlikely
that the subordinate notes will be paid off in full by the legal maturity.
The Class 2005-1 B-1 from the K2 Student Loan Trust I is
downgraded from A2 to B2 while the Class 2006-1 B-1 is downgraded
to Caa1. Under the provisions of the indenture, in the absence
of valid direction by the Issuer, the subordinate notes are redeemed
in ascending numerical order, subject to a Senior Parity test (Senior
Parity must be greater than 110%). In addition, $1.5
million of Class 2005-1 B-1 notes were redeemed in December
2007. Due to the priority of principal payments for the two classes
of subordinated notes and the current Senior Parity level (109.5%
at the end of June 2008), the Class 2005-1 B-1 may
receive further principal payments ahead of the Class 2006-1 B-1,
which results in a higher rating than that of the Class 2006-1
The ratings of Class 2007-1A-1 and 2007-1A-2
from the RTP Student Loan Trust II remain on review for possible downgrade,
since only one reporting period statement is available since the auctions
began failing in February 2008. During the review period,
Moody's will continue to review the actual performance of the trust,
as it becomes available, and compare it with current expectation.
The complete rating actions are as follows:
Issuer: K2 Student Loan Trust I - (2005 Indenture)
Series 2005-1B-1 Subordinate Notes, downgraded to
B2 from A2;
Series 2006-1B-1 Subordinate Notes, downgraded to
Caa1 from A2.
Issuer: RTP Student Loan Trust II (2007 Indenture)
Series 2007-1A-1 Senior Notes, downgraded to Aa3 from
Aaa, remain on review for further possible downgrade;
Series 2007-1A-2 Senior Notes, downgraded to Aa3 from
Aaa, remain on review for further possible downgrade;
Series 2007-1B-1 Subordinate Notes, downgraded to
Caa1 from A2.
K2 Financial, a Delaware limited liability company, is a student
loan company offering consolidation loans originated under the FFELP to
eligible applicants. Since its launch in January 2004, K2
Financial has originated over $500 million of FFELP consolidation
For more information please see www.moodys.com.
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Structured Finance Group
Moody's Investors Service
No Related Data.
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