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Fitch shifts all FFELP AAA bonds to 'negative' outlook

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Fitch Ratings on Friday has shifted to a negative ratings outlook on 362 top-rated U.S. FFELP student loan ABS tranches, a result of its July 31 decision to assign a negative outlook on the U.S. ‘AAA’ sovereign rating.

Fitch’s actions affect about $57 billion in outstanding ABS securities, but do not impact their existing AAA ratings.

The securities are backed by legacy student loans that were made through the former Federal Family Education Loan Program, and are reliant on support from the U.S. federal government to guarantee against default. (While the loans benefit from third-party guarantors, the U.S. Department of Education reinsures or reimburses those guarantors on amounts paid for the loans).

The FFELP program ended in 2010 following the launch of the federal government’s direct student-loan program during the Obama administration. But many of the outstanding loans remain as collateral in private student-loan asset-backed securities transactions issued both before and after the 2008-2009 financial crisis. The bonds are from several different sponsors and trusts, including those with loans issued and serviced by Sallie Mae Corp., Nelnet, and state-based higher education loan program authorities.

The negative ratings outlook does not indicate a potential downgrade is on the table for all or any the bonds, but is reflective of “financial or other trends that have not yet reached or been sustained [at] the level that would cause a rating action, but which may do so if such trends continue,” according to Fitch.

Fitch also stated the review does not reflect on 46 outstanding AAA-rated FFELP bonds (totaling $9 billion) that have been previously placed on review for outlook revision or downgrade due to increasing concerns of forbearance levels driven by the coronavirus pandemic.

Last May, Fitch placed 41 outstanding FFELP ABS bond tranches on review for potential downgrade, and shifted ratings outlooks on 22 classes of notes to negative from stable, while affirming ratings. Since then the agency has downgraded a 2014 SLABS deal sponsored by Navient Corp., and applied a negative outlook to several 2014-vintage Nelnet deals.

Other ratings agency have also elevated their concerns. In June, Moody’s Investors Service downgraded 38 tranches of FFELP ABS bonds across 29 private SLABS transactions from the “increased likelihood of slower collateral pool amortization and bond payoff risk” for FFELP deals with near-term maturities. The downgrades came surge in deferments, economic retraction and increased unemployment risk for borrowers under COVID-19 stresses.

Fitch revised the U.S. sovereign rating outlook to negative last week “because of the ongoing deterioration of U.S. public finances and the absence of a credible fiscal consolidation plan,” according to the ratings agency.

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Student loan ABS Nelnet Sallie Mae Corp. Navient