The public auction for NextStudent Master Trust 1 is the first of its kind for U.S. student loan ABS and is a credit negative, according to Moody’s Investors Service.

CitiGroup Capital Markets is the liquidation agent for the FFELP-backed securtiization's collateral pool sale, the purspose of which is to to repay outstanding notes.

Moody's expects proceeds from the auction to be less than the outstanding balance on the senior notes. The minimum sale price is 93% of the senior note principal balance plus accrued interest and estimated fees and expenses of the liquidation agent and transaction parties. Senior noteholders could face as much as a 7% loss on their investments. As long as the notes are outstanding, senior notes must receive all interest and principal before the subordinate noteholders receive any payments. The subordinate noteholders, as a result, will receive nothing.

Transaction documents violations started a series of events of default, Moody’s said in a recent report. Deutsche Bank, the trustee, notified noteholders in Nov. 2008 that NextStudent, as the master servicer and administrator, had failed to remit $14 million of consolidation loan rebate fees to the Department of Education. It also did not conduct a mandatory redemption of the senior notes with cash from the trust principal fund.

In January 2009, Deutsche Bank terminated NextStudent as the master servicer and administrator of the deal and became the successor master servicer and administrator.

Meanwhile, in May 2009, the issuer failed to submit the mandatory annual compliance certificate, leading to another event of default.

A year later in May 2010, a required majority of noteholders declared the notes to be due and payable in full and directed the trustee to sell the collateral and use the proceeds to pay down the senior notes.

Moody’s has downgraded the senior notes to ‘Caa1’ from ‘B3’ and subordinate notes to ‘C’ from ‘Ca.’ This reflects the rating agency's concern over the potential shortcoming in proceeds from the coming auction.

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