Moody's Investors Service has concluded its ratings review on 31 securitizations of federally guaranteed student loans sponsored by Navient Solutions to account for the slower rate of repayment of the collateral.

In a report published Friday, the rating agency said it downgraded 14 classes of notes by five notches, from ‘AAA’ to ‘A1’, to account for the risk that the notes may not pay off by their stated maturity.

Moody’s upgraded another 15 classes of notes, to ‘AAA’ from ‘Aa1’, and left its ratings on another 14 classes of notes unchanged.

In total, some $7.7 billion of securities were affected.

Moody's has now completed its review of roughly one third of the Federal Family Education Loan Program Securitizations it had on ratings watch. These bonds were once considered nearly risk free, because the U.S. government guarantees at least 97% of the defaulted principal and accrued interest of the bonds. However, the rate of repayment has over the past few years as more borrowers take advantage of deferment, forbearance, and plans that adjust repayment in line with their income.

While investors will eventually receive their principal and accrued interest, the failure to pay off at maturity is considered an event of default.

The downgrades of some lowest payment priority class A notes result in these notes being rated lower than the subordinated Class B notes in the affected securitizations. Although transaction structures stipulate that class B interest is diverted to pay class A principal upon default on the class A notes, the class B notes mature later than the downgraded class A notes. This makes it more likely that the class B notes will be repaid before maturity.

Moody’s has stated that it will complete its review of all of the FFELP bonds it had under review by December.

Navient, a student loan servicer and the second largest sponsor of FFELP securitizations, has taken numerous actions to reduce the risk of maturity defaults. It has consistently exercised its option to purchase all remaining student loans from the trusts at or below the 10% pool factor and pay off the notes. It has also amended 34 transactions to add the ability to purchase an additional 10% of the initial pool balance. In the event that Navient does not exercise the option to purchase the loans at 10% pool factor, the indenture trustee may initiate a sale of the underlying student loan pools, which will take place only if proceeds from the sale will be sufficient to pay off all outstanding notes.

Navient has also amended some transactions to establish a revolving credit facility that enables the trust to borrow money from the sponsor’s parent company in order to pay off the notes.

Finally, Navient amended 24 transactions to extend maturity dates for tranches that appeared to have significant risk of not paying off within the previous final maturities. 

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