Illinois Finance Authority (Midwestern University Foundation) (Series 2015)

Transcription

1 Presale: Illinois Finance Authority (Midwestern University Foundation) (Series 2015) Primary Credit Analyst: Lyuda Ryabkova, New York (1) ; Secondary Contact: John Anglim, New York (1) ; Table Of Contents $15 Million Graduate And Professional Student Loan Program Revenue Bonds Series 2015 Rationale Transaction Overview Loan Characteristics Standard & Poor's Expected Cumulative Default Rates: 2.75%-3.25% Payment Structure Cash Flow Analysis Break-Even Cash Flow Results Sensitivity Cash Flow Analysis Authority Overview Foundation Overview Program Overview JUNE 18,

2 Table Of Contents (cont.) Origination And Servicing Overview Related Criteria And Research JUNE 18,

3 Presale: Illinois Finance Authority (Midwestern University Foundation) (Series 2015) $15 Million Graduate And Professional Student Loan Program Revenue Bonds Series 2015 This presale report is based on information as of June 17, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Rating As Of June 17, 2015 Series Preliminary rating(i) Interest rate(ii) Preliminary amount (mil. $)(ii) Senior series 2015A AAA (sf) Fixed Subordinate series 2015B A (sf) Fixed 2.00 (i)the ratings on the bonds are preliminary and subject to change at any time. (ii)senior series 2015A and subordinate series 2015B are expected to be issued as bonds with serial maturities. The issuance amounts and interest rates will be determined on the pricing date. Profile Expected closing date Collateral Issuer Borrower Originator Trustee Servicer Underwriter June 24, Private student loans made under Midwestern University Foundation's loan program to students pursuing graduate and professional degrees enrolled at Midwestern University's Illinois campus. Illinois Finance Authority. Midwestern University Foundation. Midwestern University Foundation. The Bank of New York Mellon Trust Co. N.A. Educational Computer Systems, Inc. RBC Capital Markets LLC. Rationale The preliminary 'AAA (sf)' and 'A (sf)' ratings assigned to Illinois Finance Authority's (Midwestern University Foundation) $15 million graduate and professional student loan program revenue bonds series 2015 reflect: Approximately 17%-18% and 11%-12% credit support available in our 'AAA' and 'A' stressed break-even cash flow scenarios, respectively. These credit support levels provide coverage for the stressed credit losses that we believe are commensurate with the assigned preliminary ratings (see the Standard & Poor's Expected Default Rate and Break-Even Cash Flow Results sections below). Approximately 110% expected total parity and approximately 127% senior parity at closing. The parity is defined as a ratio of the total asset balance, including loan balance and the funds in the accounts, to the total bond balance outstanding. The senior parity is defined as a ratio of the total asset balance to the senior series 2015A bond balance JUNE 18,

4 outstanding. Approximately 9% overcollateralization (the excess of the asset balance over the notes balance, divided by the asset balance). The 13.33% subordination from the series 2015B notes (the subordinate series 2015B note balance divided by the total note balance) for the senior series 2015A notes. The reserve account with a target balance of 2.00% of the outstanding bond balance with a floor of 1.0% of initial bond balance. The existing loan characteristics, including a weighted average FICO score of 772 and a minimum FICO score of 700. $3.2 billion of the federal loan performance data on the obligors who attended Midwestern University. Standard & Poor's Ratings Services' 'A-' rating on Midwestern University. Educational Computer Systems Inc.'s (ECSI's) servicing capabilities. ECSI is the largest campus-based, student loan billing servicer in the country and has been servicing loans for more than 42 years, providing student services for more than seven million students. The timely interest and principal payments by the final maturity date made in the cash flow runs that simulated our 'AAA' and 'A' rating stress scenarios. A voluntary prepayment analysis in connection with the obligors' expected high income upon graduation, as well as the availability of refinance loans. A scenario analysis, which indicates that under moderately stressful economic conditions (defined as about 2.25x the base case defaults), the 'AAA (sf)' rating would not decline more than one rating category in the first year and that the 'A (sf)' rating would not decline more than two rating categories in the first year, which are both consistent with our credit stability criteria. The transaction's legal structure. Transaction Overview Illinois Finance Authority (the Authority) will issue the series 2015 bonds. It will loan the proceeds of the series 2015 bonds to Midwestern University Foundation (the Foundation) to provide funds--together with other available funds contributed by the Foundation--to: Finance student loans to be made, or made, by the Foundation to certain qualified graduate and professional students attending Midwestern University's Illinois campus; Fund a capitalized interest fund; Fund a debt service reserve fund; and Pay the costs of issuing the series 2015 bonds. The Foundation loans are not guaranteed or insured. All of the loans are required to be underwritten according to Foundation's loan program guidelines. In the future, additional bonds may be issued on parity with the series 2015 bonds. The series 2015 securitization includes the following transaction features: The initial total parity of approximately 110%. Excess revenues not required to pay interest and scheduled principal will be used for mandatory redemption of the bonds until the total parity reaches 140% (subject to an overcollateralization floor of $750,000). As long as the target parity is maintained, the excess revenues may be JUNE 18,

5 released to the Foundation. However, when the outstanding bond amount is equal or less than 10% of the initial bond balance, all excess revenues must be used to pay down the remaining bonds. This turbo feature locks out releases to the Foundation and is expected to result in increasing overcollateralization and parity during the later stages of the transaction and safeguard against back-ended losses. The series 2015 bonds are further secured by the reserve fund, which will be funded at closing and will equal 2.0% of the outstanding bonds. The amounts in the reserve fund will be available to pay bond interest on any interest payment date to the extent that funds in the interest account and capitalized interest fund are insufficient. The amounts in the reserve fund will also be available to pay bond principal at maturity to the extent that funds in the principal account are insufficient. The reserve fund is also subject to a floor of 1.0% of the initial bond balance. This reserve fund floor provides additional credit and liquidity enhancement as the loans amortize. The series 2015 student loan pool will consist of the existing loans (approximately $8.6 million as of April 22, 2015) and loans to be originated during the origination period that ends on July 1, 2016 (approximately $6.5 million as of April 22, 2015). The existing loans include $500,000 of the loans that the Foundation disbursed using its own funds and $8.1 million of approved loans awaiting the disbursement from the proceeds of the series 2015 bonds. The existing loans have a weighted average FICO score of 772 and a minimum FICO of 700. Approximately 36% of these loans are cosigned. The Foundation expects the loans to be originated during the origination period to have similar characteristics to the existing loans. In rating this transaction, Standard & Poor's will review the relevant legal matters and opinions outlined in its criteria (see chart 1 for the transaction structure). JUNE 18,

6 Loan Characteristics The series 2015 bonds will receive payments primarily from collections on a student loan pool. Table 1 summarizes the characteristics of the existing loans. The Foundation expects that the loans to be originated during the origination period will have similar characteristics to the existing loans. Table 1 Existing Loan Characteristics(i) Outstanding principal balance ($) 8,592,532 No. of borrowers 234 Weighted avg. outstanding principal balance per borrower ($) 36,720 Weighted avg. annual interest rate (%) 6.00 Weighted Average FICO Score JUNE 18,

7 Table 1 Existing Loan Characteristics(i) (cont.) Academic program (% of principal balance) Dental medicine 20.7 Occupational therapy 8.7 Pharmacy 10.0 Physical therapy 13.4 Physician assistant studies 44.8 Speech-language pathology 2.4 Total Years of study remaining (% of principal balance) Total FICO score (% of principal balance) Total Cosigner status (% of principal balance) Cosigner 35.8 No cosigner 64.2 Total Servicer (% of principal balance) Educational Computer Systems Inc (i)as of April 22, Standard & Poor's Expected Cumulative Default Rates: 2.75%-3.25% The Foundation contracted MeasureOne Inc., an independent firm, to perform a cumulative, lifetime default rate analysis of the loan-level information available for Midwestern University's students from the National Student Loan Data System. The analysis was based on a data set that included Federal Stafford, GradPLUS, and Consolidation loans made to Midwestern University's graduate students under both the Federal Family Education Loan Program (FFELP) and Federal Direct Stafford Loan program. MeasureOne Inc. provided Standard & Poor's with $3.2 billion worth of federal loan performance data on the obligors who attended Midwestern University and entered repayment status JUNE 18,

8 between 1995 and 2015 (see chart 2). Chart 2 Based on the aforementioned data and analysis, our base-case default rate assumptions are as follows: Table 2 Base-Case Default Rate Assumptions Base-case default rate assumption (%) Existing loans (including fully approved loans awaiting disbursement) 2.75 Loans to be originated 3.25 We expect the series 2015 pool base-case default rate to be approximately 3.0%. Applying the base-case recovery rate of 25.0% to our base-case default rate implies a base-case net loss rate of approximately 2.2%. Payment Structure The series 2015 bonds are expected to have serial maturities with fixed-rate interest payable semi-annually on each January 1 and July 1 (or the next business day), beginning Jan. 4, The money on deposit in the pledged revenue fund shall be transferred no later than the 15th calendar day of each month in the priority shown in table 3. JUNE 18,

9 Table 3 Payment Waterfall Priority Payment 1 To the rebate fund to meet the rebate fund requirement, if any. 2 To pay program expenses to the extent money is not available in the expense fund. 3 To the interest account to pay interest on the senior bonds. 4 To the principal account to pay principal on the senior bonds, including serial bond payments and sinking fund installments. 5 To the interest account to pay interest on the subordinate bonds. 6 To the principal account to pay principal on the subordinate bonds, including serial bond payments and sinking fund installments. 7 To the reserve fund as needed to meet the reserve requirement. 8 To the interest account to pay interest on the junior subordinate bonds, if any(i). 9 To the principal account to pay principal on the junior subordinate bonds, including serial bond payments and sinking fund installments, if any(i). 10 To pay other expenses to the extent money is not available in the expense fund. 11 To the redemption account to redeem the bonds until the total parity reaches 140% (subject to an overcollateralization floor of $750,000(ii)) and after the outstanding bond balance is equal or less than 10% of the initial bond balance. 12 To release to the Midwestern University Foundation. (i)no junior subordinate bonds are issued under the series 2015 transaction. (ii)overcollateralization is calculated as the excess of trust estate assets over the total liabilities (including outstanding bonds and unpaid expenses). Cash Flow Analysis The transaction was modeled to simulate stress scenarios that we believe are commensurate with the assigned preliminary ratings, including different default timing scenarios (see tables 4-5 for representative modeling assumptions). Table 4 Stressed Cash Flow Modeling Assumptions For 'AAA' Scenarios Preliminary rating AAA (sf) Overall cumulative default rate (%) Cumulative default timing fast scenario (approximate % per year)(i) Cumulative default timing slow scenario (approximate % per year)(i) Cumulative recovery rate 20/20/20/20/20 15/15/15/15/10/10/10/ % over 10 years Cumulative recovery rate timing (approximate % per year) 1.0/1.0/1.0/1.0/1.0/1.0/1.0/1.0/1.0/1.0 Voluntary prepayment rate (% CPR per year)(ii) High voluntary prepayment rate (% CPR per year)(ii) 5/6/7/8/9/10 for the transaction's remaining life 20.0 for the transaction's life Deferment (% per year) 0.00 Forbearance (% per year)(iii) 7.0/7.0/7.0 (i)we ran separate fast and slow default timing scenarios. (ii)we ran separate standard and high voluntary prepayment speed scenarios. (iii)as loans enter repayment, 7.0% of their aggregate amount goes into forbearance status for three years. CPR--Constant prepayment rate. Table 5 Stressed Cash Flow Modeling Assumptions For 'A' Scenarios Preliminary rating A (sf) JUNE 18,

10 Table 5 Stressed Cash Flow Modeling Assumptions For 'A' Scenarios (cont.) Overall cumulative default rate (%) Cumulative default timing fast scenario (approximate % per year)(i) Cumulative default timing slow scenario (approximate % per year)(i) Cumulative recovery rate 20/20/20/20/20 15/15/15/15/10/10/10/ % over 10 years Cumulative recovery rate timing (approximate % per year) 1.5/1.5/1.5/1.5/1.5/1.5/1.5/1.5/1.5/1.5 Voluntary prepayment rate (% CPR per year)(ii) High voluntary prepayment rate (% CPR per year)(ii) 3/4/5/6/7 for the transaction's remaining life 20.0 for the transaction's life Deferment (% per year) 0.00 Forbearance (% per year)(iii) 5.0/5.0/5.0 (i)we ran separate fast and slow default timing scenarios. (ii)we ran separate standard and high voluntary prepayment speed scenarios. (iii)as loans enter repayment, 5.0% of their aggregate amount goes into forbearance status for three years. CPR--Constant prepayment rate. We stressed the cumulative default rates for the pool at approximately 14.5%-15.0% and 8.5%-9.0% according to the assigned preliminary 'AAA (sf)' and 'A (sf)' ratings, respectively. Under the above stress assumptions, we expect that the transaction will pay all timely interest and note principal by the maturity dates. In addition, we ran several liquidity cash flow scenarios with zero voluntary prepayments and other 'AAA' stress assumptions specified above to test the assets' ability to repay the bonds by their maturity dates. The first liquidity scenario assumed a zero default rate. Two other liquidity scenarios assumed the base-case default rate and either a fast or a slow default curve described above. Under these liquidity cash flow scenarios, the series 2015 bonds received interest payments due on every distribution date and principal payments by the bonds' maturity dates. Break-Even Cash Flow Results In addition to 'AAA' and 'A' cash flow scenarios using the 'AAA' and 'A' default-rate assumptions, we ran break-even cash flow scenarios that maximized the default rate while keeping all other assumptions at the 'AAA' and 'A' levels. In the 'AAA' break-even scenarios, the transaction absorbed cumulative defaults in the 19%-20% range and cumulative net losses in the 17%-18% range. In the 'A' break-even scenarios, the transaction absorbed cumulative defaults in the 14%-15% range and cumulative net losses in the 11%-12% range. In each scenario, the transaction paid timely interest and note principal by the maturity dates. Sensitivity Cash Flow Analysis In addition to the 'AAA' and 'A' stressed and break-even cash flows, we ran cash flow scenarios to assess the stability of the assigned preliminary ratings under moderate stress conditions ('BBB' stress scenarios). We believe that in a moderate stress scenario, the defaults would be lower and recovery rates would be higher than those in a 'AAA' stress (see table 6). JUNE 18,

11 Table 8 Sensitivity Cash Flow Modeling Assumptions Cumulative default rate (%) Cumulative default timing fast scenario (approximate % per year)(i) 20/20/20/20/20 Cumulative default timing slow scenario (approximate % per year)(i) 15/15/15/15/10/10/10/10 Cumulative recovery rate 20.0% over 10 years Cumulative recovery rate timing (approximate % per year) 2.0/2.0/2.0/2.0/2.0/2.0/2.0/2.0/2.0/2.0 Voluntary prepayment rate (% CPR per year) 2/4/5/6 for the transaction's remaining life Deferment (% per year) 0 Forbearance (% per year)(ii) 5.0/5.0/5.0 (i)we ran separate fast and slow default timing scenarios. (ii)as loans enter repayment, 5.0%% of their aggregate amount goes into forbearance status for three years. CPR--Constant prepayment rate. In moderate stress scenarios, the cumulative remaining credit enhancement coverage of the remaining net losses builds over time (see chart 3). The lines in chart 3 represent the senior series 2015A and subordinate series 2015B credit enhancement as a multiple of the remaining net losses in the two moderate stress scenarios. Chart 3 At closing, under a moderate stress scenario, the subordinate series 2015B notes would have approximately 3.2x-3.3x JUNE 18,

12 coverage multiple of the remaining net losses. At closing, under a moderate stress scenario, the senior series 2015A notes would have approximately a 5.4x-5.5x coverage multiple of the remaining net losses. The coverage multiple rises throughout the transaction's life. Based on the cash flow scenarios above, we would expect our ratings on the senior series 2015A notes to remain within one rating category of our preliminary 'AAA (sf)' ratings in the first year and our rating on the subordinate series 2015B notes to remain within two rating categories of our preliminary 'A (sf)' rating in the first year. Both of these expectations are consistent with our credit stability criteria. (See "Methodology: Credit Stability Criteria," published May 3, 2010.) Authority Overview The Authority was created under the Illinois Finance Authority Act, which consolidated seven of the state's previously existing financing authorities. The Authority assumed all bonds, notes, or other evidences of indebtedness of the predecessor authorities effective Jan. 1, According to the act, the Authority is governed by a 15-member board appointed by the Illinois governor with the state senate's advice and consent. Foundation Overview The Foundation is a private not-for-profit corporation organized in 1994 under the Illinois law act exclusively for scientific, scholastic, charitable, and educational purposes for Midwestern University's benefit. Therefore, the Foundation is authorized to finance or otherwise acquire student loans. In November 2002, the Foundation assumed the financing for the Midwestern University's FFELP loans. The student loans involved consisted of loans made to its students by Midwestern University under the School as Lender model for participation in FFELP. Over the years, these FFELP loans were funded with proceeds from the sales of certain education loan revenue bonds issued by the Foundation and secured by those FFELP loans or by accessing funds available from the U.S. Department of Education (DOE) under its Loan Purchase Commitment and Loan Participation Program. Since the Foundation assumed the financing for Midwestern University's FFELP loans, the Foundation has issued five series of FFELP bonds, none of which are currently outstanding. Commencing with the academic year, Midwestern University ceased making FFELP loans. It exited the "school-as-lender" model by selling its outstanding loans to a third party or by putting the loans to the DOE under its Loan Purchase Commitment program. The Foundation then redeemed its then-outstanding FFELP bonds and satisfied its obligations to the DOE under the Loan Participation Program with loan sale proceeds received from the DOE. Since then, the Foundation's only activities consist of managing its investments (generated through its funding and liquidation of FFELP loans) and making periodic contributions to the university for need-based scholarship assistance to students. JUNE 18,

13 Program Overview The loans originated with proceeds of the series 2015 bonds and the initial Foundation contribution are intended to be made only to certain graduate and professional students enrolled at Midwestern University's Illinois campus and who are pursuing a master's, doctorate, or other graduate or professional degrees. In addition, the Foundation intends to initially limit program eligibility for students enrolled in certain four-year programs only to third- and fourth-year students in those programs. Students applying for loans must also demonstrate financial eligibility according to criteria that the Foundation established, which include student or cosigner FICO scores of at least 700 and student or cosigner revolving debt usage not exceeding 70% of available credit and $5,000. Origination And Servicing Overview The Foundation will be the lender of record for the financed student loans. Campus Door Holdings Inc., a Delaware corporation, will provide origination services to the Foundation. Campus Door Holdings Inc. was founded in 1995 to deliver student loans to borrowers via web-based application systems. Having processed more than $13 billion in private student loan applications, Campus Door Holdings Inc. has assisted more than 1.6 million applicants. Campus Door Holdings Inc. currently supports more than 75 institutions. ECSI, a Pennsylvania corporation and a wholly owned subsidiary of Heartland Payments Systems Inc., will service the financed eligible loans. Since 1972, ECSI has serviced student loans for many of the country's leading higher education institutions, including numerous private student loan programs at for-profit schools, not-for-profit schools, and credit unions. In addition, ECSI is the DOE's Federal Student Aid loan servicer for the Federal Perkins Loan Program. Servicing the federal portfolio required ECSI to comply with the Federal Information Security Management Act, which it achieved in July ECSI has offices located in Pittsburgh, Pa., and as of May 2015, it employs 200 associates. ECSI has more than 2,200 clients and provides student services for more than seven million students. ECSI is part of the Heartland Payment Systems family of companies, the fifth-largest payment processor in the U.S. Heartland Payments Systems Inc. currently processes more than 11 million transactions a day and more than $100 billion a year. Related Criteria And Research Related Criteria Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, May 29, 2015 Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015 Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014 Standard & Poor's Revises Its Stressed Reinvestment Rate Assumptions For Fixed-Rate U.S. Debt Obligations, May 20, 2013 Methodology And Assumptions For U.S. Private Student Loan ABS Credit Analysis, Feb. 13, 2013 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 U.S. Interest Rate Assumptions Revised for May 2012 And Thereafter, April 30, JUNE 18,

14 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Legal Criteria For U.S. Structured Finance Transactions: Appendix III: Revised UCC Article 9 Criteria, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Criteria Related To Asset-Backed Securities, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Securitizations By Code Transferors, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Securitizations By SPE Transferors And Non-Code Transferors, Oct. 1, 2006 Student Loan Criteria: Evaluating Risk In Student Loan Transactions, Oct. 1, 2004 Student Loan Criteria: Rating Methodology For Student Loan Transactions, Oct. 1, 2004 Student Loan Criteria: Structural Elements In Student Loan Transactions, Oct. 1, 2004 Student Loan Criteria: Student Loan Programs, Oct. 1, 2004 Related Research Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 United States Of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative, Aug. 5, 2011 The Rating Process For Student Loan Transactions, Oct. 1, 2004 In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, JUNE 18,

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