Fitch Takes Various Actions on EdSouth Indenture No. 10, LLC

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the senior notes at 'AAAsf' and upgrades the subordinate notes to 'AAsf' from 'Asf' of EdSouth Indenture No. 10, LLC. The Rating Outlook remains Stable for all the notes.

The affirmation is due to the notes passing both Fitch's credit and maturity stresses at the commensurate rating level.

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 is comprised of Federal Family Education Loan Program (FFELP) loans (65% of rehabilitated 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. The U.S. sovereign rating is currently 'AAA', Outlook Stable by Fitch.

Collateral Performance: Fitch assumes 33.0% base case default rate and 77.0% under the 'AAAsf 'scenario. The base case default assumption of 33.0% implies a constant default rate of 13.9% 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 0.25% in the base case and 2.0% for the 'AAAsf' case. The TTM average of deferment, forbearance, income-based repayment (before adjustment) and constant prepayment rate (voluntary and involuntary) are 6.0%, 11.5%, 4.1% and 29.7%, 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 0.06%, 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 and excess spread. As of the October 2016 distribution report, the reported total parity is 104.78% and senior parity is 107.25%. Liquidity support is provided by a reserve account sized at the greater of 0.25% of the outstanding pool balance and 0.15% of the initial pool balance. Excess funds cannot be released until all the notes are paid-in-full.

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: Day-to-day servicing is provided by Pennsylvania Higher Education Assistance Agency (PHEAA) and Great Lakes Educational Loan Services Inc. (GLESI). Fitch considers PHEAA and GLESI to be an acceptable servicer of FFELP loans based on their long history of servicing these loans and low net claim reject rates.

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 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 'AAsf';

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

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

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

Maturity Stress Rating Sensitivity

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

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

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

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

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 RULE 17G-10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch 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

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 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=1016209

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016209

Endorsement Policy

https://www.fitchratings.com/regulatory

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