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Fitch Takes Various Rating Actions on SLM 2003-12
[December 09, 2016]

Fitch Takes Various Rating Actions on SLM 2003-12


Fitch Ratings has taken the following rating actions on SLM Student Loan Trust 2003-12:

--Class A-5 downgraded to 'AAsf' from 'AAAsf'; removed from Rating Watch Negative and assigned Outlook Negative;

--Class A-6 downgraded to 'AAsf' from 'AAAsf'; removed from Rating Watch Negative and assigned Outlook Negative;

--Class B downgraded to 'BBsf' from 'BBBsf'; removed from Rating Watch Negative and assigned Outlook Stable.

Although Fitch's cash flow model indicated a higher rating for the class A-5 and A-6 notes, the downgrade to 'AAsf' is due to the counterparty risk introduced by the cross-currency swap. Swap documents do not contemplate swap counterparty replacement, or the appointment of a guarantor following the downgrade of the swap counterparty below minimum ratings expected by Fitch's counterparty criteria. Fitch believes that counterparty replacement, or the appointment of a guarantor, are the only viable longer term options for a counterparty of a continuation type derivative with deteriorating creditworthiness. The assessment of the materiality of the inconsistencies against any available mitigants, which included sufficient collateral posting and replacement provisions delinked from Fitch's ratings, suggested that contractual provisions could support ratings up to 'AAsf'.

The downgrade of the class B notes is because the bonds did not pass Fitch's 'BBBsf' credit stress scenario.

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. Fitch's U.S. sovereign rating is currently 'AAA'/Stable Outlook.

Collateral Performance: Fitch assumes a base case default rate of 13.25% and a 39.75% default rate under the 'AAA' credit stress scenario. The base case default assumption of 13.25% implies a constant default rate of 2.4% (assuming a weighted average life of 15.2 years) consistent with the trailing 12 month (TTM) average constant default rate utilized in the maturity stresses. Fitch applies the standard default timing curve. The claim reject rate is assumed to be 0.50% in the base case and 3% in the 'AAA' case.

The TTM average of deferment, forbearance, income-based repayment (prior to adjustment) and constant prepayment rate (voluntary and involuntary) are 4.7%, 8.3%, 11.1% and 8.5%, respectively, which 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 0.21%, 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 overcollateralization, excess spread and, for the class A notes, subordination. As of September 2016, total and senior effective parity ratios (which include the reserve account) are, respectively, 100.45% (0.45% CE) and 105.28% (5.0% CE). Liquidity support is provided by a reserve account sized at the greater of 0.25% of the pool balance, and $3,759,518. Excess cash will continue to be released as long as 100% parity is maintained.

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: Fitch believes Navient to be an acceptable servicer, due to its extensive track record as the largest servicer of FFELP loans.

CRITERIA APPLICATION

Under the 'Counterparty Criteria for Structured Finance and Covered Bonds', dated Sept. 1, 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. Since the only available funds to invest are those held in the Collection Account, and the funds can only be invested for a short duration given the payment frequency of the notes, Fitch does not believe such variation has a measurable impact upon the ratings assigned.

Swap documents for SLM 2003-12 do not contemplate any counterparty replacement, or the appointment of a guarantor, following downgrade of the swap counterparty below the minimum ratings expected by Fitch's counterparty criteria. In addition, collateralisation criteria are broadly in line with Fitch's expectation, in spite of lower volatility cushions than expected and no adjustments for liquidity and FX risk in collateral valuation. Fitch assessed the materiality of the inconsistencies against the available mitigants, which included sufficient collateral posting, and concluded that contractual provisions can support ratings up to 'AAsf'; this represents a criteria variation from Fitch's counterparty criteria to take into account the partial compliance of the swap documents with Fitch's criteria.

RATING SENSITIVITIES

'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 and SAP (News - Alert) provided by ED. Sovereign risks are not addressed in Fitch's sensitivity analysis.

Fitch conducted a CE sensitivity analysis by stressing both the related lifetime default rate and basis spread assumptions. In addition, Fitch conducted a maturity sensitivity analysis by running different assumptions for the IBR usage and prepayment rate. The results below should only be considered as one potential model implied outcome as the transaction is exposed to multiple risk factors that are all dynamic variables.

Credit Stress Rating Sensitivity

--Default increase 25%: class A 'AAAsf'; class B 'BBsf';

--Default increase 50%: class A 'AAAsf'; class B 'BBsf';

--Basis Spread increase 0.25%: class A 'AAAsf'; class B 'BBsf';

--Basis Spread increase 0.50%: class A 'AAAsf'; class B 'BBsf'.

Maturity Sress Rating Sensitivity



--CPR decrease 50%: class A 'AAAsf'; class B 'BBsf';

--CPR increase 100%: class A 'AAAsf'; class B 'BBBsf';


--IBR Usage increase 100%: class A 'AAAsf'; class B 'BBBsf';

--IBR Usage decrease 50%: class A 'AAAsf'; class B 'BBsf'.

It is important to note that the stresses are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration in trust performance. Rating sensitivity should not be used as an indicator of future rating performance.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC (News - Alert) RULE 17G-10

No third-party due diligence was provided or reviewed in relation to this rating action.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016)

https://www.fitchratings.com/site/re/884964

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016)

https://www.fitchratings.com/site/re/888492

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Rating U.S. Federal Family Education Loan Program Student Loan ABS (News - Alert) Criteria (pub. 10 Nov 2016)

https://www.fitchratings.com/site/re/889777

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016272

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016272

Endorsement Policy

https://www.fitchratings.com/regulatory

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