Fitch Affirms Nelnet Student Loan Trust 2006-3
--Class A-4 at 'AAAsf'; Outlook Stable.
--Class A-5 at 'AAAsf'; Outlook Stable.
--Class A-6 at 'AAAsf'; removed from Rating Watch Negative and assigned Stable Outlook.
--Class B at 'A+sf'; Outlook Stable.
Although cash flows indicated a higher rating, the affirmation of the class B notes at its current rating is due to the low level of hard credit enhancement (CE), leading to a strong dependency on excess spread.
KEY RATING DRIVERS
U. S. Sovereign Risk: The trust collateral comprises Federal Family Education Loan Program (FFELP) loans with guaranties provided by eligible guarantors and reinsurance 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: Fitch assumes a base case default rate of 17.25% and a 52.00% default rate under the 'AAA' credit stress scenario. The claim reject rate is assumed to be 0.25% for the base case and 2.0% for the AAAsf case. Fitch applies the standard default timing curve in its credit stress cash flow analysis. The trailing 12-month (TTM) average constant default rate, used in the maturity stresses, is 2.5%. TTM levels of deferment, forbearance, income-based repayment (before adjustment) and constant prepayment rate (voluntary and involuntary) are 7.1%, 8.8%, 12.7% and 9.1% respectively, and are used as the starting point in cash flow modeling. Subsequent declines or increases are modeled as per criteria. The borrower benefit is assumed to be approximately 0.22% 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: CE is provided by overcollateralization, excess spread and, for the class A notes, subordination. As of June 2016, total and senior effective parity ratios (with include the reserve account), respectively, are 100.49% (0.49% CE) and 105.23% (4.97% CE). Liquidity support is provided by a reserve account sized at the greater of 0.25% of the pool balance as of the last day of the related collection period, and 0.15% of the initial note balance. Excess cash is currently being released.
Maturity Risk: Fitch's SLABS cash flow model indicates that the notes are paid in full on or prior to the legal final maturity dates under the commensurate rating scenario.
Operational Capabilities: Day-to-day servicing is provided by Nelnet Inc. Fitch believes Nelnet to be acceptable servicers of FFELP student loans.
For transactions in surveillance, Fitch will treat certain assets such as claims filed as short-term assets in its cash flow analysis. Given that Fitch's current criteria is silent on the treatment of such assets, this treatment is considered a criteria variation. Fitch does not believe such variation has 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.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
No third-party due diligence was provided or reviewed in relation to this rating action.