The JPMorgan Chase Bank-sponsored Scholar Funding Trust 2012-B (SFT 2012-B) will be issuing class A notes worth $235 million rated by both Moody's Investors Service and Fitch Ratings.
Both rating agencies assigned provisional triple-A ratings to the deal's A-1 tranche worth $147.4 million and its A-2 portion worth $88 million.
According to a presale report from Fitch, the trust's collateral comprises 100% rehabilitated FFELP loans. Even though the rating agency estimated an elevated gross default rate, the trust collateral's credit quality remains high because of the guarantees provided by the deal’s eligible guarantors and at least 97% reinsurance of principal and accrued interest from the U.S. Department of Education.
Fitch described rehab student loans in a March 16, 2011 report. Generally, Fitch said that rehabilitation loans have higher default risk, but the government guarantee helps lessen the risk.
This incremental risk is covered by Fitch’s evaluation of transaction cash flows. These loans also have some unique characteristics when compared with traditional FFELP loans that can impact cash flows in different degrees. For example, the loss curve is assumed to be more front-loaded.
Fitch added that unlike traditional FFELP and other consumer loans, rehab loans are usually sold at a discount to par in the whole-loan markets. The discount is mostly caused by factors aside from credit risk including liquidity and cost of funding.
This can bring added risk for ABS deals where the sponsor might not have the same incentive to service a given portfolio. However, this risk is not as much in FFELP rehab ABS since sponsors are usually separate from servicers and FFELP servicing is highly regulated, Fitch said in the report.