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- Table of Contents
- The LIBOR To SOFR Transition Thus Far
- Possible Considerations For FFELP Transactions
- The transition from LIBOR to a SOFR-based index for the FFELP ABS sector is underway but remains an evolving situation.
- S&P Global Ratings currently rates 225 FFELP student loan transactions, all of which have some level of exposure to a LIBOR index.
- Potential rating implications will become clearer once the Federal Reserve provides guidance about a SOFR-based statutory replacement rate.
In anticipation of the cessation of the remaining U.S. dollar settings for the London Interbank Offered Rate (LIBOR) on June 30, 2023, and the expected transition to a Secured Overnight Financing Rate (SOFR)-based index, U.S. financial market participants and regulatory authorities have taken various actions that could affect Federal Family Education Loan Program (FFELP) transactions rated by S&P Global Ratings.
The LIBOR To SOFR Transition Thus Far
Among the actions taken was the passage of the Consolidated Appropriations Act of 2022 on March 15, 2022. This act included the Adjustable Interest Rate (LIBOR) Act, which provides for the following:
- A SOFR-based benchmark replacement framework for existing LIBOR contracts that either lack or contain inadequate fallback provisions;
- The use of compounded SOFR as the rate to calculate special allowance payments (SAP) on FFELP assets;
- The Board of Governors of the Federal Reserve to identify a SOFR-based statutory replacement rate; and
- A legal safe harbor from claims relating to the selection or use of the identified statutory replacement rate.
Possible Considerations For FFELP Transactions
The excess spread levels of some rated FFELP transactions may be affected by the federal legislation and the transition away from LIBOR-based benchmarks. For example, if the Federal Reserve recommends term SOFR as the statutory replacement rate (as suggested by the "Notice of Proposed Rulemaking" [NPRM], published July 29, 2022), an interest rate mismatch could arise for most FFELP transactions that incorporate compounded SOFR on assets (via the SAP rate) and term SOFR on liabilities.
Similarly, excess spread may be affected in a subset of FFELP transactions that implemented the interest rate fallback guidelines recommended by the Alternative Reference Rates Committee (ARRC) in 2019. The transaction documents for these securitizations were written or amended to include the ARRC-recommended LIBOR replacement language that designated term SOFR as the replacement rate for LIBOR-indexed liabilities.
At this time, it is unclear how potential questions like these may be addressed or what effect any determinations might have on the FFELP transactions we rate. In the past, industry participants--including issuers, sponsors, trade and advocacy groups, and regulatory and governing bodies--have come together to address similar issues. Since the NPRM publication in July 2022, a group of student loan trade associations jointly responded by advocating for the implementation of compounded SOFR (rather than term SOFR) for FFELP assets and liabilities. We will continue to monitor further developments concerning these matters as they unfold.
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