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ECMC’s AAA rating carries smudge reflecting U.S. sovereign risk

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Educational Credit Management Corp. (ECMC) is issuing its third securitization since the start of the pandemic that is collateralized entirely by Federal Family Education Loan Program (FFELP) rehabilitated loans but still carries a negative outlook from Fitch Ratings.

The $360.9 million ECMC Group Student Loan Trust 2020-3 is larger than $339.5 million transaction ECMC issued in September. That deal priced at 115 basis points over one-month Libor, below the pricing guidance of between 120 basis points and 125 basis points. JP Morgan Securities was structuring lead on the earlier deal and is listed as the sole arranger on the current deal.

ECMC’s first securitization in 2020, for $324 million, priced for a significantly higher coupon of $2.26%, according to Finsight, but its credit enhancement of 8.00% was lower than the 8.5% structured into the second and current deals.

Both Fitch and Moody’s Investors Services respectively rate the notes AAA and Aaa, although Fitch gives the rating a negative outlook.

“The Negative Rating Outlook is the result of Fitch’s revision of the Rating Outlook to Negative on the U.S. sovereign Issuer Default Rating,” the rating agency said in its presale report.

Fitch affirmed the United States AAA rating July 31, 2020, but revised its outlook to negative. It said that the sovereign rating is supported by structural strengths, including the size of the U.S. economy and its dynamic business environment.

“However, the Outlook has been revised to Negative to reflect the ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan …,” the report says.

The notes’ top ratings stem from their collateral — entirely FFELP student loans, which are reinsured by the U.S. Department of Education for at least 97% of defaulted principal and accrued interest. The Moody’s presale report listed deal strengths including excess collections beginning to pay principal after November 2026 and a substantial reserve account. Its challenges, the rating agency said, include Covid-related unemployment limiting borrowers’ ability to service debt, and basis risk from a mismatch between the interest rates on the notes and loans.

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