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Rating Action:

Moody's downgrades and places on review for downgrade certain FFELP student loan ABS

03 Jun 2020

Approximately $11 billion of asset-backed securities affected

New York, June 03, 2020 -- Moody's Investors Service ("Moody's") has downgraded 38 securities issued by 29 FFELP student loan securitizations. Of those 38 downgraded securities, nine from four transactions have also been placed on review for possible further downgrade. Separately, Moody's has placed the ratings of additional seven securities issued by five FFELP student loan securitizations on review for possible downgrade. The securitizations are backed by student loans originated under the Federal Family Education Loan Program (FFELP) that are guaranteed by the US government for a minimum of 97% of defaulted principal and accrued interest.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL425603 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

Today's review for downgrade actions reflect an increased likelihood of slower collateral pool amortization and bond payoff risk by their legal final maturity dates due to significant increases in forbearance resulting from a contraction in economic activity and an increase in unemployment due to the coronavirus outbreak.

Today's downgrade actions are primarily driven by the updated performance of the transactions and updated expected loss on the tranches across Moody's cash flow scenarios. Moody's quantitative analysis derives the expected loss for a tranche using 28 cash flow scenarios with weights accorded to each scenario. In addition, Moody's also considered the resiliency of these bonds and associated expected loss to an increased forbearance scenario due to the coronavirus outbreak.

As part of our coronavirus stress analysis, we considered an increase in forbearance of up to approximately 20% and 30% for consolidation and non-consolidation loans, respectively, over a period of up to 24 months. The increased forbearance assumption considers both existing delinquent borrowers and additional non-delinquent borrowers who may seek this relief due to the impact of the coronavirus outbreak. We also considered servicers' borrower relief strategies and increases in forbearance observed on FFELP loans during the last financial crisis as well as the more recent natural disaster forbearance use during the 2017 hurricanes.

In addition to the above-mentioned rationale, today's rating actions incorporate the following note-specific considerations.

The rating actions reflect the granularity of the collateral data Moody's receives. Generally, more granularity allows for a better understanding of the collateral characteristics important in evaluating performance and the likelihood of repayment by the bonds' final maturity dates. Given the low likelihood of our modeled assumptions persisting for an extended period of time, certain Navient notes with final maturity dates of more than five years are rated higher than indicated by the model output. The downgrade actions of Class A-7 notes of SLM 2003-11, Class A-6 notes of SLM 2004-8, Class A-4 notes of SLM 2005-2 and Class A-5 notes of SLM 2005-8 reflect considerations of the collateral data granularity in relation to the remaining time to the bonds' respective maturities.

Additionally, Moody's also considered Navient's and Nelnet's willingness and ability to support and prevent their securities from defaulting at their legal final maturity dates. In addition to the 10% clean-up call, Navient can use other forms of liquidity support. The downgrade actions of Class A-3 notes of SLM 2008-3 and Class A-4 notes of SLM 2007-3, 2007-7 and 2008-1 are primarily due to the bonds' approaching maturities. The maturities for these tranches are between October 2021 and January 2022.

The rating actions further reflect the lengthening of the weighted average remaining terms of some of the underlying non-consolidation loan pools, which, for certain deals, increases the risk that bonds will not pay off by maturity. The downgrade actions on the Class B notes of SLM 2010-1, Class A notes of SLM 2010-2, Class B notes of SLM 2013-5, and Class A-3 and A-4 notes of Navient 2014-1 reflect the increasing payoff risk of these tranches by their final maturity dates. Over the 12-month period between 03/31/2019 and 03/31/2020, the weighted average remaining loan terms increased by three to nine months for these deals. The review for downgrade action on Class A notes of SLM 2010-2 further reflects its higher payoff risk under our coronavirus stress forbearance assumptions.

Today's action also considered the increased uncertainty related to non-amortizing "bullet" bonds with short-term maturities. The 2010 A-1-7 and A-1-8 bonds from New Mexico Educational Assistance Foundation (NMEAF) were issued as non-amortizing bonds that are expected to receive principal payment only on their respective final maturities, 12/1/2020 and 12/1/2021. Although 30% of the principal due on the bonds maturing in 12 months is being set aside each quarter from the available collections, the non-amortizing structure of the bonds and their short time to final maturity would subject them to higher payoff risk if cash collections were to materially reduce over the coming months. Effective in mid-March, the servicer, NMEAF, placed all loans more than 30 days past due in a 90-day natural disaster forbearance status. By placing delinquent borrowers in forbearance status, the servicer effectively reset the number of days past due of these loans to zero, pushing back claims for federal payments by over a year if these loans were to default. The review for downgrade actions on the 2010 A-1-7 and A-1-8 bonds thus reflect an expected slowdown of cash collections due to an increase in forbearance as a result of the servicer's action in response to the coronavirus outbreak.

During the review period, Moody's will evaluate the effects of ongoing and projected macroeconomic conditions, as well as the impact of various parties including the government, servicers and issuers on the performance of underlying pools to update our assumptions. Unemployment is a key indicator of performance for student loan ABS. High unemployment is likely to have a material negative impact on the amortization speed of student loans. Rating actions on the bonds will vary for the different issuer shelves and will reflect individual transaction performance and considerations.

Moody's generally strives to conclude rating reviews within 90 days. However, due to the high degree of uncertainty in the current credit environment, the resolution of these watchlist actions may extend beyond our usual timeframe. Ratings that are placed on review for possible downgrade, or ultimately downgraded, are meant to signal increased risk of credit loss. They are generally not, however, declarations that losses are expected.

Our analysis has considered the effect of the coronavirus outbreak on the US economy as well as the effects that the announced government measures put in place to contain the virus, will have on the performance of consumer assets. Specifically, for FFELP student loan ABS, loan performance could weaken due to a continued increase in the unemployment rate, which may limit borrowers' income and their ability to service debt. Furthermore, borrower assistance programs to affected borrowers, such as forbearance, deferment and income-based repayment, may adversely impact scheduled cash flows to bondholders.

The contraction in economic activity in the second quarter will be severe and the overall recovery in the second half of the year will be gradual. However, there are significant downside risks to our forecasts in the event that the pandemic is not contained and lockdowns have to be reinstated. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was "Moody's Approach to Rating Securities Backed by FFELP Student Loans" published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1226065. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the ratings:

Up

Moody's could upgrade the ratings if the paydown speed of the loan pool increases as a result of declining borrower usage of deferment, forbearance and IBR, increasing voluntary prepayment rates, or prepayments with proceeds from sponsor repurchases of student loan collateral. Moody's could also upgrade the ratings owing to a build-up in credit enhancement.

Down

Moody's could downgrade the ratings if the paydown speed of the loan pool declines as a result of lower than expected voluntary prepayments, and higher than expected deferment, forbearance and IBR rates, which would threaten full repayment of the class by its final maturity date. In addition, because the US Department of Education guarantees at least 97% of principal and accrued interest on defaulted loans, Moody's could downgrade the rating of the notes if it were to downgrade the rating on the United States government.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL425603 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Endorsement

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

The following disclosure applies only to credit ratings carrying the (sf) indicator:

In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jiaoren Wang
Associate Lead Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jinwen Chen
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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