Fitch Takes Various Rating Actions on South Carolina Student Loan Corp. Series 2008-1 Sr Notes
-- Class A-3 affirmed at 'AAAsf'; Outlook Stable;
-- Class A-4 downgraded to 'AAsf' from 'AAAsf'; removed from Rating Watch Negative and Outlook Stable assigned.
The affirmation of the senior class A-3 notes at 'AAAsf' is due to the notes passing cash flow stresses at their respective rating level. The class A-4 notes do not pass Fitch's 'AAA' maturity stress; therefore, the notes were downgraded to 'AAsf' from 'AAAsf'. The recommendation to maintain the Stable Outlook on the class A-3 notes is based on the notes performing within expectations. The class A-4 notes have been removed from Rating Watch Negative and assigned a Stable Outlook as the notes are expected to perform at their revised rating category.
KEY RATING DRIVERS
U. S. Sovereign Risk: The trust collateral consists of 100% of Federal Family Education Loan Program (FFELP) loans. Guarantees are provided by the transaction's eligible guarantors and reinsurance is provided by the U. S. Department of Education (ED) for at least 97% of principal and accrued interest. The U. S. sovereign rating is currently 'AAA'/Outlook Stable by Fitch.
Collateral Performance: For SCSLC 2008-1, Fitch assumes a 5.00% base case default rate and a 14.75% default rate under the 'AAA' credit stress scenario. The claim reject rate is assumed to be 0.25% in the base case and 2% in the 'AAA' case. Fitch applies the standard default timing curve, with the trailing 12-month (TTM) constant default rate (CDR) and prepayment levels as assumptions for FFELP loans in its cash flow analysis. The TTM average levels of deferment, forbearance and income-based repayment (IBR) are 15.14%, 18.46% and 15.00%, respectively, which are used as the starting point in cash flow modelling. Subsequent declines or increases are modelled as per criteria. The borrower benefit is assumed to be approximately 0.18% based on information provided by the sponsor.
Basis and Interest Rate Risk: Fitch applies its standard basis and interest rate stresses to this transaction as per criteria.
Payment Structure: Credit Enhancement (CE) is provided by excess spread and overcollateralization. As of the June 2016 distribution report, total parity is 129.59% (22.83% CE). Liquidity support is provided by a reserve account currently sized at the greater of 1.00% of the principal balance of the notes outstanding, and 0.10% of the initial note balance. The trust is in turbo, and cash cannot be released from the trust until the notes have been paid in full.
Maturity Risk: Fitch's SLABS cash flow model indicates that the class A-3 notes are paid in full on or prior to their respective legal final maturity in Fitch's 'AAA' credit and maturity stresses. The class A-4 notes miss their legal final maturity in Fitch's 'AAAsf' rating maturity stress; therefore, the class A-4 notes have been downgraded to 'AAsf'.
Operational Capabilities: South Carolina Student Loan Corporation is responsible for the day-to-day servicing of the portfolio. Fitch believes all to be acceptable servicers of FFELP student loans at this time.
Under Fitch's 'Counterparty Criteria for Structured Finance and Covered Bonds', dated June 18, 2016, Fitch looks to its own ratings in analyzing counterparty risk and assessing a counterparty's creditworthiness. The definition of permitted investments for this deal allows for the possibility of using investments not rated by Fitch, which represents a criteria variation. Fitch does not believe such variation has a measurable impact upon the ratings assigned.
Under Fitch's criteria 'Rating U. S. Federal Family Education Loan Program Student Loan ABS Criteria', dated July 26, 2016, Fitch does not address the process by which it gives certain credit to short-term assets in its cash flow analysis, and it is therefore considered a criteria variation.
Since FFELP student loan ABS rely 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 and basis risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults and basis shock beyond Fitch's published stresses could result in future downgrades. Likewise, a build-up of credit enhancement driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.
DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed in relation to this rating action.