Fitch Rates PHEAA Student Loan Trust 2016-1

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned the following ratings to PHEAA Student Loan Trust 2016-1 student loan asset-backed notes:

--$533,950,000 floating rate class A notes 'AAAsf'; Outlook Stable;

--$11,573,000 floating rate class B notes 'Asf'; Outlook Stable.

Although cash flow indicated a higher rating for the class B notes, the recommendation is to assign 'Asf' due to low hard credit enhancement leading to strong dependency on excess spread. Additionally, the class B notes have an interest cap. Fitch rates to the class B Interest cap and does not rate to the class B carryover interest.

KEY RATING DRIVERS

U.S. Sovereign Risk: The trust collateral comprises Federal Family Education Loan Program (FFELP) loans, 18.6% of which are rehab loans, with guarantees 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 currently rates the U.S. sovereign 'AAA' with a Stable Outlook.

Collateral Performance: Fitch assumes a 23% base case default rate and 56.5% under the 'AAAsf' scenario. The claim reject rate is assumed to be 0.25% for the base case and 2% for the 'AAAsf' case. Fitch applies the standard default timing curve, CDR and prepayment assumptions for FFELP loans in its cash flow analysis. Current levels of deferment, forbearance and IBR are 7.6%, 12.2%, 13.4%, respectively, which are used as the starting point in cash flow modeling. Subsequent declines or increases are modeled as per criteria. Fitch assumes 0.4% borrower benefits in the cash flows analysis based on information provided by PHEAA.

Basis and Interest Rate Risk: Fitch applies its standard basis and interest rate stresses to this transaction as per criteria.

Payment Structure: Cash flows for the 2016-1 notes were satisfactory under 'AAAsf' and 'Asf' stress for class A notes and class B notes, respectively. Total credit enhancement (CE) is provided by overcollateralization (OC), excess spread and subordination provided by the class B notes for the class A notes. At closing, senior and total parity are expected to be 103.7% and 101.5%. The trust has a specified OC amount equal to the greater of 1.8% of the current adjusted pool balance and $8,305,596 that must meet before any excess cash can be released. After Sept. 30, 2020, the trust will stop releasing any excess cash and use these funds to accelerate the note principal payments.

Maturity Risk: Fitch's student loan ABS cash flow model indicates that both the senior and subordinate notes are paid in full on or prior to their legal final maturity of Sept. 25, 2065 in the 'AAAsf' and 'Asf' maturity stress scenario, respectively.

Operational Capabilities: PHEAA will service the portfolio and Fitch considers PHEAA to be an acceptable servicer since they have a long history servicing FFELP student loans.

RATING SENSITIVITIES

Since FFELP student loan ABS rely on the U.S. government to reimburse defaults, 'AAAsf' FFELP ABS ratings will likely move in tandem with the 'AAA' U.S. sovereign rating. Aside from the U.S. sovereign rating, defaults and basis risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults and basis shock beyond Fitch's published stresses could result in future downgrades. Likewise, a build-up of credit enhancement driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.

Key Rating Drivers and Rating Sensitivities are further described in the updated presale report titled 'PHEAA Student Loan Trust 2016-1', dated Sept. 1, 2016 available on www.fitchratings.com, or by clicking on the link.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

Fitch was provided with Form ABS Due Diligence - 15E (Form 15E) as prepared by Ernest & Young LLP. The third-party due diligence described in Form 15E focused on comparing the sample characteristics provided in the data file of random sample of 200 student loans to the corresponding information in the respective loan files. Fitch considered this information in its analysis, and it did not have an effect on Fitch's analysis or conclusions.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under 'Related Research' on the presale report. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions,' dated May 31, 2016.

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

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/site/re/879815

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 Criteria (pub. 26 Jul 2016)

https://www.fitchratings.com/site/re/881705

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011658

ABS Due Diligence Form 15E 1

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1011658&flm_nm=15e_1011658_1.pdf

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011658

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings

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Source: Fitch Ratings