NEW YORK - Moody's Investors Service said it downgraded 24 classes and confirmed 3 classes of student loan revenue bonds, Series XVII, issued by Michigan Finance Authority, previously known as Michigan Higher Education Student Loan Authority.
The underlying collateral consists of student loans originated under the Federal Family Education Loan Program (FFELP) and the authority's private loan program, MI-LOAN.
The downgrades are primarily a result of higher than originally projected net losses on the underlying collateral pool. As a result of a sale of approximately $1 billion of FFELP student loans out of the pool, the proportion of the private student loans increased from 12% to 45%.
Although the performance of the MI-LOAN collateral has been in line with the original expectations, such loans are not guaranteed by the Department of Education.
Therefore, the rise in their proportion led to an increase in the net collateral losses without a corresponding increase in available credit enhancement.
Although the total parity, i.e. the ratio of total assets to total liabilities, was 107.5% as of the latest reporting date of March 31, 2012, it did not sufficiently offset the higher net collateral losses.
In addition, the transaction generates negative carry in Moody's high interest rate cash flow scenarios. The sale of FFELP student loans resulted in a replacement of a significant portion of the trust's collateral with proceeds from the sale.
As of the March 31, reporting date, cash represented approximately 49.4% of the trust's total assets. The significant amount of cash contributes to negative carry, which is particularly severe in Moody's high interest rate cash flow scenarios.
Because coupon payments on the tax-exempt securities, which comprise approximately 85% of the outstanding bonds, are calculated as an interest rate index times a specified multiple, while the yield on the loans is calculated as an index plus a spread, the transaction will have a disproportionate increase in the coupon payments relative to the asset yield in the high interest rate scenarios. This will lead to a substantial compression of excess spread.
The complete rating actions are as follows:
Michigan Higher Education Student Loan Authority (Series XVII)
XVII-I-5, confirmed at A1 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-P-1, confirmed at A1 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-Q-1, confirmed at A1 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-G-1, downgraded to Baa1 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-L, downgraded to Baa1 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-G-2, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-H-5, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-H-6, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-I-6, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-K-2, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-K-4, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-K-5, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-K-6, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-K-7, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-M-1, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-M-2, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-N-1, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-N-2, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-N-3, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-N-4, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-N-5, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-N-7, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-O, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-P-2, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-P-3, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-Q-2, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
XVII-Q-3, downgraded to Ba3 (sf); previously on Nov 23, 2011 A1 (sf) placed under review for possible downgrade
