Three Ratings Lowered On Two SLM Student Loan Trusts

OVERVIEW
  • We reviewed two discrete SLM Student Loan Trusts, which are ABS backed by FFELP student loans.
  • We lowered our rating on the senior class from the 2006-1 trust to 'BB (sf)', and we downgraded its corresponding subordinate class to 'BB (sf)'.
  • In addition, we lowered our rating on the senior class from the 2007-2 trust to 'BB (sf)'.
  • The primary drivers for today's rating actions are the liquidity pressure the senior classes are experiencing, the remaining time to legal final maturity, and the change in payment structure upon an event of default.
NEW YORK (S&P Global Ratings) Jan. 29, 2019--S&P Global Ratings today lowered 
three ratings from two SLM Student Loan Trusts, which are asset-backed 
securities (ABS) backed by Federal Family Education Loan Program (FFELP) 
student loans.

Our rating actions primarily reflect the liquidity pressure the senior classes 
are experiencing, not the credit enhancement levels available to these classes 
for ultimate principal repayment. Our ratings address each trust's ability to 
make timely interest payments, as well as its ability to repay the note 
balances by their respective legal final maturity dates. We considered each 
trust's asset/note payment rate, expected future collateral performance, 
payment priorities, and current credit enhancement levels.

RATIONALE
The primary drivers in our analysis are sensitivity to payment amounts, the 
remaining time to maturity, and the change in payment structure upon an event 
of default. We also considered the further decline in payment levels since our 
last review. We have reviewed the historical amounts paid to these trusts and 
noted significant declines in payment rates, due to reduced collateral payment 
rates, over time.

Assuming that the trusts continue to receive the minimum quarterly amount 
received over the past year, or an amount less than that, we believe the class 
A notes are sensitive to receiving full principal payments after their legal 
final maturity dates. As such, we lowered our ratings to 'BB (sf)' from 'A 
(sf)' on the senior classes. These classes are within five years of their 
legal final maturity dates and have heightened sensitivity to any future 
declines in note principal payment rates. We previously lowered the ratings on 
the senior classes from both the trusts to 'A (sf)' in 2018. Since then, their 
payment levels have not improved, and they are now closer to maturity. We 
believe these classes face major uncertainty that could lead to the trusts' 
inadequate capacity to meet their financial commitment on these obligations.

We also lowered our rating on class B from the 2006-1 trust, to match the 
rating of the senior note. This rating action reflects our view that the risk 
of nonpayment of principal for the class A notes is the same as the risk of 
nonpayment of timely interest on the class B notes. An event of default on a 
senior note due to missing repayment on its legal final maturity date triggers 
a structural change in which all principal payments to class A noteholders are 
prioritized over periodic interest payments to the class B note. As a result, 
the class B notes may not receive periodic interest payments until the class A 
notes have been repaid. As such, our rating on the class B note is not higher 
than the rating on the senior note. If a senior note were paid in full at its 
legal final maturity date, the risk of a missed interest payment on the class 
B note would be avoided. In this case, we may raise our rating on the class B 
note.

COLLATERAL
These trusts are discrete trusts backed by FFELP student loans originated 
through the U.S. Department of Education's (ED's) program. The loan pools 
consist predominantly of seasoned Stafford, PLUS, and Supplemental Loans for 
Students (SLS) loans originated under FFELP guidelines. The ED reinsures at 
least 97% of the principal and accrued interest on defaulted loans that are 
serviced according to the FFELP guidelines. Due to the high level of 
recoveries from the ED on defaulted loans, defaults effectively function 
similar to prepayments. Thus, we expect net losses to be minimal. 
Approximately 35% of the pools are in a nonpaying loan status (in-school, 
grace, deferment, forbearance, claims filed, and loans that are more than 30 
days delinquent). These loans are expected to be repaid or to default and be 
reimbursed by the ED.

CREDIT ENHANCEMENT 
Credit enhancement consists of overcollateralization (as measured by parity), 
subordination (for the senior classes), the reserve account, and excess 
spread. The classes are fully collateralized, and we expect them to receive 
payment in full, but the likelihood that they will be repaid after their legal 
final maturity has increased as the note principal paydowns have slowed.

CURRENT PAYMENT STRUCTURE
The notes receive interest based on three-month LIBOR and their respective 
margin. Principal distribution amounts are allocated sequentially. The 2007-2 
trust has reached its required release thresholds and is releasing excess 
funds to the residual holders. The 2006-1 trust has a pool factor less than 
10% of the initial pool balance and has now turned into a turbo structure. 
Accordingly, releases to the issuer are not allowed until all of the notes are 
paid in full. 

REQUEST FOR COMMENT OF PROPOSED CRITERIA CHANGE
Today's rating actions apply our current approach as described above. On Nov. 
12, 2018, we published a request for comment of proposed criteria change, 
which notifies the market that we are reviewing our criteria for assigning 
ratings to U.S. FFELP student loan ABS transactions. The proposed criteria 
will revise our current ratings approach to classes that are at higher risk of 
repayment after their legal final maturity dates. 

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