Fitch Ratings will apply its updated surveillance criteria in a review of its ratings on U.S. FFELP student loan ABS. The review includes subordinated bonds, the agency announced today.
The updated standards incorporate a more refined approach to basis risk. Fitch’s global structured finance rating criteria and FFELP student loan ABS rating criteria will be used in the review, which will incoprorate trusts with Libor floater bonds only.
Other structures, such as trusts with auction-rate securities, will be reviewed when the critera are expanded to account for the structure.
Ratings on subordinate bonds with no overcollateralizaiton from trusts that release excess spread will be among the most negatively affected, with expected ratings between ‘BBB’ and ‘BB’.
Bond ratings that benefit from overcollateralization and cannot release cash will likely range from ‘AAA’ to ‘BBB’ .
Asset deficient bonds are at additional risk for downgrades, but the severity may be tempered if previous reviews yielded lower ratings. Senior bonds with parity of 103% or more with stable or increasing parity trends will likely remain stable at ‘AAA’, according to Fitch.
The new criteria takes into account the exposure to basis factor volatility, or the spread between the spot three-month Libor rate that determines the liability rate and base special allowance payment (SAP) rate earned on the underlying loans. Basis risk exposure depends on the mix of student loans tied to t he T-bill and commercial paper rate, the agency said.
The credit rating agency may also apply qualitative adjustments to the rating to account for structural benefits such as turbo features that require trusts to strap excess spread. Liquidity risk will also be analyzed, Fitch said.