Tuesday, 30 September, 2008
The prolonged freeze on the auction-rate securities (ARS) market may begin to manifest itself in negative rating actions on U.S. student loan trusts that use ARS, according to Fitch Ratings in a new report.
'While most trusts have shown resilience to the market freeze, none were structured to withstand permanent market dislocation, making negative rating actions on certain transactions less a case of if and more a case of when,' according to Managing Director and U.S. ABS group head Kevin Duignan. 'Absent some sort of remediation such as refinancing or restructuring, affected transactions will see negative rating actions, particularly at the subordinate levels.'
While the ratio of assets to liabilities, or parity ratio, is a leading indicator of the health of the trust, Fitch notes that the definitions of the available funds caps in each deal are also a critical factor to the analysis of the future performance of SL ARS transactions. A decline in the parity ratio indicates that the trust may not be generating sufficient income to pay its expenses as scheduled but the available funds caps imbedded in these transactions were not consistently defined. These definitions can have a significant impact on determining the speed of parity change.
Fitch has been paying particularly close attention on the rate and speed of parity change in its review of all student loan ARS transactions, which is ongoing. 'The quicker or more pronounced the declining parity ratio, the more likely that the student loan trust will be either placed on Rating Watch Negative or downgraded, particularly at the subordinate note level,' said Senior Director Andrea Murad.
Fitch currently has outstanding ratings on approximately 110 trusts that have issued ARS, with approximately 35% containing parity ratios below 100%. Fitch anticipates completing its review of all ARS trusts financing student loans in the coming months.
Source: http://www.marketwatch.com