Standard & Poor's said this morning that a significant portion of FFELP SLABS ‘AAA’ ratings have been lowered to ‘AA+’ because of the U.S. sovereign downgrade.
However, the rating agency stated that rising student loan default rates are not a major concern for FFELP ABS credit since the Department of Education (DoE) guarantees loans at a minimum rate of 97%.
The DoE's 2009-cohort, two-year default rate for federal student loans increased to 8.8% from 7% in 2008.
Yesterday Wells Fargo analysts released a report showing the results of an analysis they made on S&P's rating actions on FFELP SLABS. The rating agency started these actions after it downgraded the U.S. sovereign to 'AA+' in August 2011.
S&P is currently reviewing the risk of FFELP ABS on what seems to be security-by security basis. The agency is doing this after applying a 15% haircut on all expected cash flows from the federal government guaranty.
So far, S&P has reviewed roughly 390 Class A notes. Approximately 40% of these bonds' 'AAA' ratings were affirmed. But, 60% of the reviewed Class A notes were downgraded by the rating agency to 'AA+', Wells Fargo analysts noted.
"We found that specific indenture language concerning nonmonetary events of default represented an important component of S&P rating actions," analysts wrote.
Their analysis demonstrated that FFELP ABS with indenture language that maintains sequential principal payment to the Class A generally fared better than those that switched to a pro rata distribution of principal following a nonmonetary event of default.
In general, Wells Fargo analysts said that all but the last cash flow Class A tranche were affirmed at 'AAA' for deals that S&P anticipated would be remaning as seqeuntial-pay.