Late yesterday, Standard & Poor's affirmed ratings on 239 ABS classes of FFELP-backed SLABS that it placed on credit watch negative last July.
These affirmations comprise 26 'AAA'-rated classes, with the rest being senior bonds rated no higher than 'AA+', which is the current U.S. government rating and mezzanine and subordinate classes rated no more than 'AA'.
Additionally, ratings on 118 classes that are now rated below the U.S. government rating are still on credit watch negative for counterparty or performance-related issues.
However, the rating agency left 1,035 of the 'AAA' and 'AA+' FFELP classes that it rates on negative watch as a result of the U.S. sovereign exposure and/or counterparty related issues.
Yesterday's action is what Barclays Capital analysts called a "partial resolution of the wholesale watch-listing of the FFELP universe following the July 15 watch-listing of the U.S. government rating."
The affirmations, they said, included senior bonds that were rated 'AAA' that have senior parity ratios of at least 140% or are expected to achieve such a level within nine months. The senior bonds rated 'AA+' that were not placed on credit watch negative before July 15, and mezzanine and subordinate bonds rated 'AA' that were not placed on credit watch negative before the said date.
Analysts noted that in affirming the 'AAA' classes, the agency assumed a 40% default rate, with no credit for loan seasoning or the U.S. government guaranty. This is, they said, "a rather draconian assumption."
According to them, the more reasonable action by the agency was the affirmation of senior and mezzanine/subordinate classes rated 'AA+' and 'AA', respectively. They said that these bonds were previously downgraded as a result of performance or counterparty risk, and given this, the U.S. sovereign rating has no effect on them.
Senior bonds with parity ratios of less than 140% are still on negative watch while the agency further refines its 'AAA' assumptions for FFELP deals without a U.S. 'AAA' sovereign rating.
S&P might still downgrade some of its 984 'AAA' ratings to 'AA+' pending completion of its review. Deals that have mezzanine/subordinate classes rated 'AA+' that have senior classes downgraded to 'AA+' might see downgrades on the mezzanine/subordinate notes to reflect their subordinate position in the capital structure, the rating agency said.
Despite the possibility of negative ratings action, Barclays analysts think investors still believe that FFELP-backed SLABS remain fundamentally sound, regardless of the lowered U.S. government sovereign rating or the Washington, DC political situation.
The U.S. government will stand by its guaranty of the underlying student loans, Barclays analysts noted, making timely payments on submitted claims.
They said that inspite of the U.S. economy's weak recovery as well as rising cohort default rates, SLABS are still performing well. Citing the still ongoing European debt crises as well as other global uncertainty, the continued government FFELP guaranty of SLABS is "comforting to investors," according to Barclays analysts.
"Incorporating the strong market technicals, the sound fundamental picture, and the government guaranty of the underlying loans, we believe further spread widening is likely limited," analysts wrote.
They added that at current spread levels, they think that FFELP SLABS are still have compelling relative value among consumer ABS.