ECMC returns with another $500M Rehab FFELP ABS

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ECMC Group is marketing another $409 million of notes backed by federally guaranteed student loans that were once delinquent but are now making timely payments.

The deal, dubbed ECMC Group Student Loan Trust 2017-2, will issue a single, $500.5 million tranche of notes with preliminary AAA ratings from Fitch Ratings.

ECMC is a non-profit organization based in Delaware that acts as a student loan guaranty agency. When Federal Family Education Loans default, the lender submits a claim to the guarantor, which assumes the loan and "rehabilitates" it, or helps the borrower resume making timely payments. The guarantor can then resell the loan to another eligible lender; in this case, Manufacturers and Traders Trust Co., which serves as the trustee for the securitization trust.

A loan is considered to be rehabilitated when the borrower has made at least nine timely payments in a 10-month period. Although these loans exhibit much higher default rates than regular FFELP loans, they benefit from the same government guarantee as non-rehabilitated FFELP loans.

In addition to the higher default rate, rehab loans exhibit a more front-loaded default curve compared to regular FFELP loans; both features are negative to the transaction’s cash flow, according to Fitch. On the other hand, certain features related to rehabilitated loans positively affect ABS transaction cash flows, such as potentially lower claims reject rates and cumulatively reduced utilization of deferment, forbearance, and borrower benefits

Approximately 53.5% of non-consolidation loans and 46.5% of consolidation loans.

Fitch estimates the base case default rate to be 55% for non-consolidation loans and 60% for consolidation loans. "Given the composition of this pool, this leads to a base case default assumption of 57.25% and a AAA stressed level of 100%," the presale report states.

The trust will have a revolving line of credit with ECMC that can be tapped should available funds be insufficient to pay any outstanding principal balance of the notes on its final maturity date. However, Fitch did not give credit to the revolving credit agreement in its analysis.

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