July 02 - Fitch Ratings has affirmed The Higher Education Securitised Investment No.1 plc (Thesis), a transaction backed by student loans, as follows:
GBP29.4m Class A3 notes affirmed at ‘CCCsf’; RR 40%
GBP7.9m Class A4 notes affirmed at ‘CCCsf’; RR 40%
Fitch affirms the current rating on the notes as the transaction keeps performing roughly in line with Fitch’s latest expectations. The ‘CCCsf’ rating reflects the uncertainty as to the full repayment of the A3 and A4 classes of notes, which in Fitch’s opinion no longer benefits from any sizeable margin of safety.
The class A3 and A4 notes, which are equally ranking in the priority of payments, currently benefit from a credit enhancement of 7.8%, or 5.6% if the balance of the arrears provisioning ledger is removed from the supporting assets. Based on a forward-looking projection incorporating a monthly default rate of 0.5%, a monthly payment rate of 1.5%, and a reversion of 30% of the deferred loans to repayment status, Fitch found that the class A3 and A4 notes would be recovered for only around 40% of their balance as of May 2012.
Fitch noted the existence of excess interest in the transaction since around mid-2010, causing a net redemption of the interest accrual facility, which funds the interest due and unpaid under the non-defaulted loans of the portfolio. The reasons for such excess interest are currently unclear however, given the very large majority of the loan portfolio is deferment status; as a result Fitch did not give any credit to such excess interest in its analysis. The origins of the excess interest are being investigated by the transaction servicer and the cash manager.
The loan portfolio now comprises around 78.8% of deferred loans, 9.2% of loans in repayment status without arrears, and 12% of loans in repayment status with arrears. The large proportion of deferred loans does not in itself impair the transaction, as the UK government is essentially committed to compensate the issuer for any such loan still outstanding 25 years after origination, if not in arrears. The government compensation covers the unpaid interest accrued on the loans, and recapitalised as a result; this protects the transaction against carry costs. The UK government would also pay a subsidy to the transaction in case the rate of accrual of the liabilities (based on Libor) was to exceed the rate of accrual of the assets (based on RPI). The impairment of the rated notes may arise from defaults on loans in repayment status, or on loans currently on deferment and moving to repayment status as a result of the borrower’s improving income. Given the current economic context and employment prospects for graduates in the UK, deferred loans seem unlikely to switch massively to repayment status seems; however, Fitch believes the risk that some of them would do, cannot be disregarded. The current impairment of the junior, non-rated notes in the transaction comes essentially from the cumulative defaults of around GBP111m to date, the equivalent of 10.9% of the closing portfolio balance.
Thesis is a securitisation of floating-rate student loan receivables, originated in the UK by the government-owned Student Loan Company Limited, with a final legal maturity date on 30 April 2028.