Bonds Backed by Student Loan Take Hit

A recent article I read in the FortMillsTimes…… bottom line…Student loan bonds are getting risky bet for bond buyers. Read more…

Solvency issues related to poorer student loan guarantor reserve ratios should be limited to a small number of guarantors with insufficient reserves to cover liquidity shortages. Fitch Ratings believes these liquidity issues to be manageable for most bondholders in U.S. FFELP student loan Asset Based Security trusts in the medium term due to the reserve funds the trusts maintain and the federal backstop. Last week, the U.S. Department of Education (ED) published a report showing guarantors’ reserve ratios declined in 15 states and increased in 17.
We believe the decline is partially due to the increase in student loan defaults. The ED reported in the fall that the 2010 two-year national cohort default rate was 9.1%. This increased guarantor costs for default aversion and default claims. We also believe the decline in reserve ratios is due, in part, to a reduction in guarantors’ revenues. The termination of FFELP stopped the insurance fees guarantors had received.

In our view, this could create a short-term liquidity issue for some trusts if guarantors begin to delay payments to address their financial issues.

We do not expect a direct credit impact on Fitch-rated securities because we assumed a 540-day payment lag in our cash flow analysis. Most trusts have sufficient reserves to cover a liquidity shortage and allow commingling of principal and interest collections to smooth short-term liquidity needs.

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About defaultprevention

Default Prevention Specialist since 1998.
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