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Fitch Affirms SLM Student Loan Trust 2012-1

06/29/2022 | 08:05am

Fitch has affirmed the outstanding notes of SLM Student Loan Trust 2012-1.

RATING ACTIONS

Entity / Debt

Rating

Prior

SLM Student Loan Trust 2012-1

A-3 78446WAC1

LT

Bsf

Affirmed

Bsf

B 78446WAD9

LT

Bsf

Affirmed

Bsf

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Transaction Summary

In affirming SLM 2012-1 at 'Bsf' rather than downgrading to 'CCCsf' or below, Fitch has considered qualitative factors such as the time to maturity of the senior series A-3 notes (September 2028), Navient's ability to call the notes upon reaching 10% pool factor, the revolving credit agreement in place for the benefit of the noteholders, and the eventual full payment of principal in modelling. The trust has entered into a revolving credit agreement with Navient by which it may borrow funds at maturity in order to pay off the notes. If this revolving credit facility is utilized it will result in positive rating pressure to this transaction.

KEY RATING DRIVERS

U.S. Sovereign Risk: The trust collateral comprises 100% Federal Family Education Loan Program (FFELP) loans, with guaranties provided by eligible guarantors and reinsurance provided by the U.S. Department of Education for at least 97% of principal and accrued interest. The U.S. sovereign rating is currently 'AAA'/Negative.

Collateral Performance: Based on transaction-specific performance to date, Fitch assumes a cumulative default rate of 26.50% under the base case scenario and a 79.50% default rate under the 'AAA' credit stress scenario. Fitch maintained its sustainable constant default rate (sCDR) assumption of 4.00% and its sustainable constant prepayment rate (sCPR; voluntary and involuntary prepayments) of 11.00% in cash flow modeling. Fitch applies the standard default timing curve in its credit stress cash flow analysis. The claim reject rate is assumed to be 0.25% in the base case and 2.0% in the 'AAA' case. The TTM levels of deferment, forbearance, and income-based repayment are 6.27%, 16.21%, and 25.31%, respectively. These assumptions are used as the starting point in cash flow modeling and subsequent declines or increases are modeled as per criteria. The borrower benefit is assumed to be approximately 0.03% based on information provided by the sponsor.

Basis and Interest Rate Risk: Basis risk for this transaction arises from any rate and reset frequency mismatch between interest rate indices for Special Allowance Payments and the securities. The majority of the loans are indexed to LIBOR. All notes for SLM 2012-1 indexed to one-month LIBOR. 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, overcollateralization, and for the class A notes, subordination. As of May 2022, for SLM 2012-1 total and senior effective parity ratio (including the reserve) are 101.36% (1.34% CE) and 113.49% (11.89% CE) respectively. Liquidity support is provided by a reserve account sized at 0.25% of the outstanding pool balance, currently equal to the floor of $764,728. Excess cash will continue to be released as long as 1% OC is maintained.

Operational Capabilities: Day-to-day servicing is provided by Navient Solutions, LLC. Fitch believes Navient to be an acceptable servicer, due to its extensive track record as the largest servicer of FFELP loans.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

'AAAsf' rated tranches of most FFELP securitizations will likely move in tandem with the U.S. sovereign rating given the strong linkage to the U.S. sovereign, by nature of the reinsurance provided by the Department of Education. 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.

This section provides insight into the model-implied sensitivities the transaction faces when one assumption is modified, while holding others equal. Fitch conducts credit and maturity stress sensitivity analysis by increasing or decreasing key assumptions by 25% and 50% over the base case. The credit stress sensitivity is viewed by stressing both the base case default rate and the basis spread. The maturity stress sensitivity is viewed by stressing remaining term, IBR usage and prepayments. The results should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. It should not be used as an indicator of possible future performance.

Credit Stress Rating Sensitivity

Default increase 25%: class A 'CCCsf'; class B 'Asf';

Default increase 50%: class A 'CCCsf'; class B 'BBBsf';

Basis Spread increase 0.25%: class A 'CCCsf'; class B 'Asf';

Basis Spread increase 0.5%: class A 'CCCsf'; class B 'BBBsf'.

Maturity Stress Rating Sensitivity

CPR decrease 25%: class A 'CCCsf'; class B 'AAsf';

CPR decrease 50%: class A 'CCCsf'; class B 'Asf';

IBR Usage increase 25%: class A 'CCCsf'; class B 'AAsf';

IBR Usage increase 50%: class A 'CCCsf'; class B 'AAsf'.

Remaining Term increase 25%: class A 'CCCsf'; class B 'BBBsf';

Remaining Term increase 50%: class A 'CCCsf'; class B 'CCCsf'.

Fitch has revised its global economic outlook forecasts as a result of the war in Ukraine and related economic sanctions. Downside risks have increased highlighted in the special report, 'What a Stagflation Scenario Would Mean for Global Structured Finance', an assessment of the potential rating and asset performance impact of a plausible, albeit worse than expected, adverse stagflation scenario. Fitch expects the FFELP student loan ABS sector, under this scenario, to experience mild to modest asset performance deterioration, indicating some Outlook changes (between 5% and 20% of outstanding ratings).

Asset performance under this adverse scenario is expected to be more modest than the most severe sensitivity scenario below. The severity and duration of the macroeconomic disruption is uncertain, but is balanced by a strong labor market and the build-up of household savings during the pandemic, which will provide support in the near term to households faced with falling real incomes.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Credit Stress Rating Sensitivity

Default decrease 25%: class A 'CCCsf'; class B 'AAAsf';

Basis Spread decrease .25%: class A 'CCCsf'; class B 'AAsf'.

Maturity Stress Sensitivity

CPR increase 25%: class A 'CCCsf'; class B 'AAAsf';

IBR usage decrease 25%: class A 'CCCsf'; class B 'AAAsf';

Remaining Term decrease 25%: class A 'CCCsf'; class B 'AAAsf'.

The current ratings assigned to the trust are most sensitive to Fitch's maturity risk scenario; therefore, an extension of the legal final maturity date of the senior notes, which would effectively mitigate the maturity risk in Fitch's cash flow modeling and result in positive rating pressure. Additional secondary factors that may lead to a positive rating action are: material increases in the payment rate and/or a material reduction in the weighted average remaining loan term.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

(C) 2022 Electronic News Publishing, source ENP Newswire

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