Fitch Ratings said today that its outlook for both FFELP and private SLABS is negative. The rating agency expects both sectors to remain in the headlines in 2012.
The agency expects FFELP SLABS collateral performance to stay stable through the next year. The Negative Rating Outlook for all triple-FFELP tranches reflects the agency's Negative Rating Outlook on the long-term foreign and local currency U.S. issuer default ratings (IDRs). Without any significant developments, the agency does not expect to resolve the Negative Rating Outlook until late 2013.
"While ‘AAA’ ratings are still attainable for new FFELP deals, Fitch will designate a Negative Rating Outlook on those tranches at closing," said Michael Dean, managing director at Fitch Ratings.
Meanwhile, the rating agency's outlook on the private student loan sector is negative given ongoing stress in the labor markets, which has caused higher-than-anticipated defaults and ratings volatility. However, rating actions will continue to be issuer and transaction specific.
"Unemployment among recent college graduates will result in higher-than-anticipated defaults and ratings volatility for private student loan ABS," Dean said.
In terms of FFELP student loans, as of Dec. 2, its Rating Outlook for all ‘AAA’-rated FFELP ABS tranches was Negative. This outlook reflects the agency's Negative Rating Outlook on the long-term foreign and local currency U.S. IDRs.
FFELP collateral credit quality will remain high, considering the reinsurance provided by the U.S. Department of Education (ED). While ‘AAA’ ratings can still be attained for new-issue FFELP student loan ABS, Fitch will designate a Negative Rating Outlook on those tranches at closing.
Fitch expects that FFELP securitizations in 2012 will mostly continue to be structured more robustly versus those completed before the recession. More credit enhancement, full turbo structures, and the use of stronger servicers and/or backup servicing arrangements should remain the norm, according to Fitch.
In terms of private student loans, Fitch’s outlook on the private student loan ABS sector remains negative given that the unemployment among recent college graduates has caused higher-than-anticipated defaults and ratings volatility in the private student loans.
Private student loan collateral securitized prior to the recession was mostly underwritten to less stringent credit standards and the related ABS deals were structured more aggressively, compared with those originated post-recession. As such, these offerings are less able to absorb the higher potential for performance volatility, which results in greater susceptibility to downgrades.
The credit crisis has caused a consolidation of private student loan originators. Less competition has resulted in more selective securitization pools, more robust structures, and the use of more experienced servicers.
Private student loan ABS are vulnerable to the general macroeconomic factors affecting all consumer loans. Increased unemployment, perhaps resulting from a double-dip recession, would place added downward pressure on the ratings assigned to private student loan ABS.
Conversely, U.S. economic growth and less unemployment would result in lower delinquency and defaults on private student loan collateral. This will positively impact offerings backed by this collateral.