Fitch Ratings has downgraded more than a dozen tender-option bond issues and variable-rate demand obligations.

One Merrill Lynch TOB was slashed to BBB from AAA. Fitch also downgraded the TOB’s short-term rating to F2 from F1.

Merrill Lynch owns a Series 2004 $200 million bond from the Access to Loans for Learning Student Loan Corp. It has put the bond in a trust and has issued the TOB based on payments from the bond, said Fitch managing director Jeff Schaub. The payments for the TOB are based on payments from the original bond, he said.

On Friday Fitch downgraded the bond issue sold by Access to Loans to BBB from AAA. The action came as part of a larger Fitch downgrade to 10 Federal Family Education Loan Program student loan asset-backed security trusts.

The TOB does not have any long-term credit enhancement, Schaub said. Thus, its long-term rating is based solely on the underlying bond’s rating. So when the underlying bond was downgraded, the TOB had to be dropped as well, he said.

Bank of America provides short-term enhancement on the TOB. However, as the original issuer’s long-term credit declines there is an increasing possibility that the credit could deteriorate to the point that the bank would terminate the letter of credit, Schaub said. Fitch has to factor in the possibility that at some point in the future the bank may not be there if and when investors put the TOBs. That explained the downgrade of the short-term rating, he said.

On Tuesday Fitch also downgraded several VRDOs to BBB from A-minus. Among them were two issued by the New Jersey Economic Development Authority (one for the Port Newark Container Terminal LLC and another for the Frisch School); two issued by Terre Haute, Ind., for Westminster Village; two issued by the Iowa Finance Authority for Edgewater, and two issued by the Health Facilities Development Corporation of Central Texas for the Sears Caprock Retirement Corp.

Sovereign Bank provides LOCs for all of the bonds. Fitch downgraded the bank in the last few days. Since the bonds’ long-term rating is based on the Sovereign Bank rating, Fitch had to downgrade the debt, Schaub said.

Finally, Fitch left the long-term rating of three VRDOs intact but downgraded the short-term rating to F2 from F1. One was issued by the Arizona Sports and Tourism Authority for a multipurpose stadium facility and two were issued by the Colorado Health Facilities Authority for NCMC Inc. Fitch rates the Arizona obligation A and the Colorado bonds A-plus.

The bonds could pay from either the issuer of the LOC or the obligor, Schaub said. The bonds’ long-term ratings are the obligors’ ratings or the bank’s rating, whichever is higher. In this case, the obligors’ rating is higher than that of Compass Bank, which Fitch recently downgraded.

However, since the short-term rating is solely determined by the bank’s rating, the bonds’ short-term rating was correspondingly downgraded to follow the drop of Compass Bank, he said.

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