Market updates and sector developments

Moody's has placed 12 tranches from nine FFELP student loan securitisations administered by Nelnet and 61 tranches from 11 FFELP ABS serviced by Nelnet on review for downgrade. The rating actions follow Nelnet's disclosure of a collateral data reporting approach that appears to have understated the remaining term of loans in Income-based Repayment Plans (IBR).

Nelnet last week disclosed that starting with its servicer reports posted on or after 25 August, it will include an alternate calculation of weighted average remaining term to maturity (WAM) to address the treatment of the remaining term of FFELP loans that are in IBR. Until now, Nelnet is understood to have calculated and reported WAM for IBR loans based on the loan term at origination minus the time in repayment, an approach that the firm refers to as ‘current WAM’. However, Moody’s notes that most borrowers generally either stay in IBR-PFH (partial financial hardship) or transition to the IBR-Permanent-Standard (IBR-PS) plan, which typically extends the borrower's remaining repayment term.

In its recent announcement, Nelnet says that it will start reporting both the ‘current WAM’ and an ‘alternate WAM’ that will be based on the remaining term of IBR loans consistent with the terms of the IBR plans. This alternate WAM is significantly longer than the current WAM for many transactions, according to Moody’s.

As such, the rating agency’s review actions take into account the increased likelihood that certain notes issued before 2016 will not pay off by their legal final maturity dates, due to the extension of the remaining term on some of the underlying loans. “Longer remaining loan terms adversely impact collateral cashflows and can have material adverse impact on amortisation of the notes prior to their legal final maturity dates. Notes that have long legal final maturity dates are less susceptible to this risk,” it explains.

During the review period, Moody’s will assess the likelihood of the bonds being paid off prior to the legal final maturity dates based on its updated cashflow modelling - reflecting the alternate WAM calculation for loans in IBR reported by Nelnet, where applicable, and updated prepayment and performance information.

The affected transactions comprise: Academic Loan Funding Trust 2012-1 and 2013-1; ALG Student Loan Trust I (2004 Indenture) and II (2007 Indenture); College Loan Corporation Trust I (2002 Indenture), II (2007 Indenture) and 2005-2; Student Loan Consolidation Center Student Loan Trust I (2002 Indenture); KeyCorp Student Loan Trust 2004-A, 2005-A and 2006-A; Nelnet Student Loan Trust 2006-3, 2007-1, 2012-1, 2012-2, 2012-4, 2012-5, 2013-2 and 2013-3; and Wachovia Student Loan Trust 2005-1.

Corinne Smith