The Education Resources Institute (TERI) filed for Chapter 11 yesterday. According to a report from Barclays Capital, Moodys Investors Service's downgrade of TERI to 'B2' from 'Baa3' on March 26 tripped a trigger in a loan contract. This resulted in the student loan firms having to post cash to cover its student loan guarantees.
Barclays said that TERI's bankruptcy filing has implications for First Marbleheads securitizations that relate to note repayments, determining trigger events, and subordinate note ratings. Barclays explained that the NCSLT deals were structured with a fully funded TERI pledge fund that is available to be drawn upon as private student loans in the trust default. The pledge fund is considered an asset of the trust and, as such, should be considered outside the reach of the bankruptcy court, Barclays said. When the pledge fund is depleted, the trust would usually look to TERI to make payments on defaulted loans it insured.
But, Barclays said that with the firm now in bankruptcy proceedings, reductions as well as delays in payments on defaulted trust student loans are highly probable, since the loan guarantees will likely be treated similarly
to general creditors, Barclays said.
Barclays explained that another of the filing's direct effect could be seen in the different triggers incorporated in the NCSLT deals. Transaction documents highlight note interest, note principal and turbo triggers based on cumulative default ratios, which, if breached, usually result in the reallocation of cash flow priorities to the benefit of senior note holders. However, Barclays said that there are outs for these triggers provided certain conditions exist.