Some student loan ABS might experience downgrades if they do not meet proposed guidelines on operational risk outlined in a new report from Moody's Investors Service.
Certain student loan ABS characteristics, particularly in the FFELP sector, lessen the operational risks compared with other ABS.
According to the report, the roles and responsibilities of some of the key parties on the deals are different in student loan ABS compared with other asset classes.
First, in FFELP offerings, the duties of the administrator and/or master servicer are usually limited and are typically not hard to perform or transfer.
Second, Moody's analysts said that FFELP loans have low servicing risk looking at the history of the various successful transfers without the loss of the government guaranty, and the loans' easy transferability because of standardized servicing platforms.
Third, in the rating agency's proposed guidelines, Moody's applies the same rule for deals that are sponsored or serviced by a state agency or a U.S. state's public instrumentality with those sponsored or serviced by investment grade-rated entities. This is because states are highly likely to do an orderly transfer of the master servicing and administration functions if the current master servicer exits the business, Moody's analysts said in the report.
The new report was issued as a companion to the rating agency's December request for comment that showed the credit impact of operational risk on global structured finance deals. The report offered specific guidelines on the master servicing, administration and primary servicing arrangements necessary to get a 'Aaa' on student loan ABS.
"The roles and responsibilities of some key transaction parties, including master servicers, primary servicers and trustees, are different in student loan ABS compared with other asset classes," said Nicky Dang, a Moody's assistant vice president.
According to the operational risk guidelines, the ratings of 47 SLABS trusts issued by 15 issuers, comprising roughly 11.3% of total outstanding SLABS measured by dollar volume, could be impacted.
"Most Aaa rated notes issued by FFELP trusts that do not meet the proposed guidelines could be downgraded to 'Aa', with a small group of notes possibly downgraded to 'A'," Dang said. "'Aaa'-rated notes issued by private and mixed student loan trusts with more than 10% private student loans may be downgraded to Baa depending on the specific operational risk to which a trust is exposed."
