Fitch downgrades ratings on Vermont Student Assistance Corp-1995 Bond Resolution

Submitted by tim on Wed, 11/20/2013 - 00:10

Fitch Ratings has downgraded all the outstanding bonds for Vermont Student Assistance Corp - 1995 Bond Resolution. The bonds were removed from Rating Watch Evolving and assigned a Stable Rating Outlook. Fitch used its 'Global Structured Finance Rating Criteria', 'U.S. Private Student Loan ABS Criteria' and 'U.S. FFELP Student Loan ABS Criteria' to review the transaction. A full list of ratings actions follows at the end of this press release.
KEY RATING DRIVERS
The downgrade on the bonds reflects insufficient credit enhancement to support the current ratings of 'BBB-sf'. Credit enhancement (CE) consists of excess spread and overcollateralization. Although the total parity is currently at 108.46%, Fitch only gives credit to the CE up to the 103% cash release level given additional cash may be released from the trust.
Currently, the trust is collateralized by approximately $31 million of private student loans and $45 million FFELP student loans. The FFELP loans have guarantees provided by eligible guarantors and reinsurance provided by the U.S. Department of Education (ED) for at least 97% of principal and accrued interest. The composition of the trust changed in June 2013, as $58 million of FFELP loans were pulled out of the trust. For the private student loan, Fitch projects the remaining default to be in the range of 14% to 16% as percentage of the current pool balance. The recovery is estimated to be 10% based on information provided by the issuer.
The main driver of the downgrades is due to interest rate risk embedded in the tax-exempt auction rate securities (ARS) and default risk of private student loans. Currently, the bonds in this trust are comprised of 70% tax-exempt and 30% taxable ARS. The majority of the bonds are currently paying interest at a contractually determined maximum rate due to failed auctions. The maximum rate for the tax-exempt bonds is calculated as the product of the S&P Weekly High Grade Index and the applicable percentage, ranging from 200% - 300%. The maximum rate for the taxable bonds is calculated as 91 day T-Bill plus the applicable spread at 1.75%. All of the bonds in this trust do not benefit from a net loan rate and as such interest rates could increase to maximum rates of 14% to 18% for tax-exempt and taxable ARS, respectively.
The 70% tax-exempt ARS are particularly susceptible to interest risk, due to the multiplier effect on the interest expense if interest rates rise. Fitch analyzed the current interest rates on the bonds in addition to the effect on the trust if the interest rates on the bonds were to increase to the maximum rates applying the LIBOR up interest rate stresses. In LIBOR up scenarios, the bond's coupon will increase enough to compress excess spread and erode parity.
Fitch applied qualitative adjustments to the ratings in order to account for long maturity horizon that leaves some limited upside potential (such as favorable rate environment or successful auction).
RATING SENSITIVITIES
For private student loan ABS, Fitch's base case default proxy is derived primarily from historical collateral performance; actual performance may differ from the expected performance, resulting in higher loss levels than the base case. This will result in a decline in credit enhancement (CE) and remaining loss coverage levels available to the bonds and may make certain bond ratings susceptible to potential negative rating actions, depending on the extent of the decline in coverage.
Since FFELP student loan ABS rely on the U.S. government to reimburse defaults, 'AAAsf' FFELP ABS ratings will likely move in tandem with the 'AAA' U.S. sovereign rating. Aside from the U.S. sovereign rating, defaults and basis risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults and basis shock beyond Fitch's published stresses could result in future downgrades.
Fitch downgraded and assigned Outlooks to the following classes:
Vermont Student Assistance Corp. 1995 Resolution Bonds
--Class 1998L to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2000R to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2001Z to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class2002DD to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2001X to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class2001Y to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2001AA to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2003KK to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2004PP to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2004OO to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2005RR to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2005SS to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2006VV to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2007WW to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2007XX to 'B-sf' from 'BBB-sf'; Outlook Stable;
--Class 2007YY to 'B-sf' from 'BBB-sf'; Outlook Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'U.S. Private Student Loan ABS Criteria' (Jan. 29, 2013);
--'Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria' (May 17, 2013).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=7...
Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria -- Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=7...
U.S. Private Student Loan ABS Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=6...
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808615
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NEW YORK--(BUSINESS WIRE)--Fitch Ratings 11.19.2013