Pricing spreads for securitizations that pool Federal Family Education Loans continue to widen on the back of the ratings actions taken by Fitch and Moody’s in July.
Spreads for short-dated tranches (with terms between 1.3-years and 1.5-years) widened to 94 basis points in August from 41 basis points in July; intermediate dated tranches (with terms that range between 4-years to 5 years) widened to 153 basis points from 73 basis points; and spreads for tranches with terms of 5.8-years to 7-years widened by 72 basis points to 163 basis points, according to TRACE transaction data cited in Friday's Bank of America Merrill Lynch Securitization weekly.
"These moves in spreads reflect perceived risk (i.e., ratings and cash flow) at the tranche level and broader market concerns," stated analysts in the report. "Both of these factors likely mean spreads will move to wider levels."
At the crux of rating agencies' concern is whether the bonds will pay off by their legal final maturity dates. Not doing so would represent an event of default under securitization trust documents. Although the Department of Education gurantees up to 97% of principal and interest of FFELP loans, that only kicks in when a borrower defaults.
Moody’s has placed on review for downgrade 118 tranches in 70 deals, while Fitch has placed on watch negative, 62 traches in 24 deals. Most of the securities involved were issued by SLM student loan trust in 2007 and 2008.