Fitch Ratings has placed another $30 billion of bonds backed by guaranteed student loans under review for potential downgrades.
The latest wave involved 238 tranches of bonds from 118 Federal Family Education Loan Program (FFELP) securitization trusts. When added to the 77 tranches already under review, the total rises to approximately $37.5 billion of outstanding securities.
That’s roughly the same amount that rival agency Moody’s Investors Service has under review.
Both Fitch and Moody’s are concerned that FFELP bonds may not pay off at maturity because the loans backing them are being repaid so slowly.
Fitch said Friday that the magnitude of the cuts could vary significantly depending on remaining time to maturity, recent payment trends, issuer actions such as loan purchases, or other external factors. But absent any issuer actions, structural or other mitigants, it is possible that bonds now rated 'AAA' ratings could be lowered to noninvestment grade rating categories.
The main drivers of the heightened maturity risk are prepayments and principal repayment rates coming in more slowly than initial expectations. Fitch said the decline in prepayment rates has followed the consolidation wave and a slow recovery in the job market for graduates during and after the recession. But the growing popularity of generous repayment plans has also resulted in slower overall repayment speeds.
Helping offset these declines more recently are an improving in labor market, expansion of debt consolidation programs, seasoning of portfolios and recent issuer actions to address this risk.