Fitch Affirms Edsouth Indenture No. 7, LLC, Series 2014-3 Notes
OREANDA-NEWS. Fitch Ratings affirms the ratings on the senior and subordinate notes issued by Edsouth Indenture No. 7, LLC, Series 2014-3 (ESA 2014-3):
--Class A notes affirmed at 'AAAsf'; Outlook Stable;
--Class B notes affirmed at 'Asf'; Outlook Stable.
Interest on the class B notes is subject to the class B interest cap; however, Fitch does not rate to any payment of the class B carryover amount.
KEY RATING DRIVERS
Collateral Quality: The trust collateral consists of 100% of Federal Family Education Loan Program (FFELP) loans. The credit quality of the trust collateral is high, in Fitch's opinion, based on the guarantees provided by the transaction's eligible guarantors and reinsurance provided by the U. S. Department of Education (ED) for at least 97% of principal and accrued interest. Fitch currently rates the U. S. 'AAA' with a Stable Outlook.
Credit Enhancement: Credit enhancement (CE) is provided by overcollateralization (OC; the excess of trust's asset balance over bond balance) and excess spread. In addition, the senior notes benefit from the subordination provided by the class B notes. As of April 2016, total parity is 103.6% (3.47% CE) and senior parity is 106.9% (6.45% CE). Cash may be released to the issuer when the Specified OC Amount equals the greater of 2.25% of the adjusted pool balance and $300,000. Since the Specified OC Amount has been met, the trust is releasing cash to the issuer.
Liquidity Support: Liquidity Support: is provided by a $5,900,000 capitalized interest fund and a reserve fund sized at $337,299 as of April 2016. The capitalized interest fund will terminate on the July 25, 2016 distribution date, and any remaining funds will be disbursed as available funds. The reserve fund requirement is equal to the greater of 0.25% of the pool balance and 0.15% of the initial pool balance.
Servicing Capabilities: Day to day servicing for the trust is provided by Pennsylvania Higher Education Assistance Agency (PHEAA) and Great Lakes Education Loan Services (Great Lakes). Fitch believes both PHEAA and Great Lakes to be acceptable servicers of FFELP student loans given their extensive servicing experience.
In certain LIBOR-down interest rate stress scenarios the basis spread may be compressed, as Fitch would apply a floor to 1-month LIBOR at a negative rate level in accordance with Fitch's 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' dated May 2016. Since the updated interest rate stresses are not addressed yet in existing FFELP criteria, this represents a criteria variation. Use of the criteria variation did not have a measurable impact upon the ratings assigned.
Since the FFELP student loan ABS relies on the U. S. government to reimburse defaults, 'AAAsf' FFELP ABS ratings will likely move in tandem with the 'AAA' U. S. sovereign rating. Aside from the U. S. sovereign rating, defaults, basis risk, and loan extension risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults, basis shock beyond Fitch's published stresses, lower than expected payment speed, and other factors could result in future downgrades. Likewise, a build-up of CE driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.