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Fitch Affirms Navient Corporation's IDR at 'BB'; Outlook Stable
April 5, 2017 / 4:04 PM / in 6 months

Fitch Affirms Navient Corporation's IDR at 'BB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 05 (Fitch) Fitch Ratings has affirmed Navient Corporation's (Navient) Long-Term Issuer Default Rating (IDR) and senior unsecured debt rating at 'BB' and Short-Term IDR at 'B'. The Rating Outlook is Stable. A full list of ratings is detailed at the end of this release. KEY RATING DRIVERS - IDRs AND SENIOR DEBT The rating affirmation reflects Navient's strong market position and demonstrated servicing track record (as part of its predecessor organization) in the student loan servicing space, the low credit risk and predictable cash flow nature of its federal student loan assets and fee-based businesses, appropriate risk-adjusted capitalization, adequate liquidity and seasoned management team. Rating constraints include Navient's concentrated business model, reliance on wholesale funding sources, refinancing risk associated with elevated unsecured debt maturities in the 2018-2019 time period, long-term strategic uncertainty and heightened regulatory, legislative and litigation risk. Navient's $112 billion loan portfolio ($32 billion of Federal Family Education Loan Program Stafford loans, $55 billion of FFELP Consolidation loans and $25 billion of private loans) at Dec. 31, 2016 are in run-off, which means the company's third-party servicing and asset recovery operations (Business Services segment) are the primary sources of potential long-term core earnings growth. However, the student loan portfolio is expected to amortize over an extended period of time which, Fitch believes, could provide the company with time to execute on growth initiatives aimed at offsetting the declining loan portfolio, including getting back into the private student loan origination business once its non-compete agreement with SLM Corporation ends in January 2019. Net interest income on the FFELP and private student loan portfolios continue to account for the vast majority of earnings, but Navient has made progress growing the contribution from its Business Services segment. The company's acquisitions of Gila, LLC (Gila), and Xtend Healthcare (Xtend) in 2015 helped drive non-education fee revenue up 77% in 2016 from the prior year, and management is projecting this revenue to grow by more than 20% in 2017. In July 2016, Navient was selected by the U.S. Department of Education (ED) as one of three companies to bid for ED's contract to create a new unified servicing platform for the Direct Student Loan Program. Conversely, United Student Aid (USA) Funds, Inc., Navient's largest federal student loan guarantor client representing roughly $170 million of Navient's 2016 revenue, was acquired by a competitor, creating uncertainty as to whether Navient will be able to retain this important relationship beyond 2017. An inability of Navient to retain existing contracts and secure new contracts could result in negative ratings momentum. Acquisitions of student loan portfolios over the past two years have been complicated by the emergence of technical default risk on FFELP securitizations that stems from the myriad government-sponsored student debt payment relief programs that have slowed the pace of borrower repayments, and may result in certain ABS transactions being in default if the bonds are not fully repaid by their legal final maturity dates. In an effort to avoid bond downgrades and technical defaults, Navient has sought to exercise its option to accelerate the purchase of remaining pools of loans held within its more fully amortized FFELP trusts, as well as obtain investor approval to extend the maturity dates of the trusts under review for rating actions. Fitch views management's ability to take several actions to mitigate the impact of this issue on its liquidity and funding favorably. With less than $1 billion of Navient-sponsored FFELP transactions on Negative Watch as of March 31, 2017, Fitch believes the uncertainty surrounding the potential impact of the legal final maturity date issue has largely lifted as evidenced by the tightening of FFELP ABS spreads over the past year and new transaction issuance. Fitch believes Navient has made meaningful progress toward strengthening its liquidity position over the past 12 months by issuing unsecured debt amounting to $1.25 billion in 2016 and $750 million thus far in 2017. With the additional liquidity, Navient was able to reduce its unsecured debt balance by $1.4 billion over the course of 2016 and Fitch expects that it will continue to work toward reducing 2018 and 2019 maturities over the course of 2017.The company was also able to execute another repurchase facility, extracting liquidity from the overcollateralization of certain private student loan trusts in 2016, which further enhanced its liquidity position. While core earnings are expected to continue to be pressured after declining 14% in 2016, driven by further shrinkage of its student loan portfolio, Fitch expects cash flows to be more stable than earnings, supported by the release of residuals and overcollateralization from its securitization trusts. Fitch believes Navient's operating cash flows will be sufficient to service unsecured debt maturities over the next 12 months, but liquidity coverage weakens in the 2018-2020 period, given elevated unsecured debt maturities, including $2.1 billion in 2018, $2.4 billion in 2019 and $2.1 billion in 2020. The company can offset this pressure by extracting additional overcollateralization from its student loan ABS trusts, through securitization of unencumbered loans, issuance of senior unsecured notes, and/or reducing shareholder distributions. Further, Navient could continue to utilize excess liquidity and cash flow to prepay unsecured debt through open-market repurchases and tender offers. An inability to execute on these options in advance of the higher unsecured debt maturities beginning in 2018 could lead to negative rating actions. On Jan. 18, 2017, after conducting a review of the servicing practices of student loans that included an investigation of Navient over the prior three years, the Consumer Financial Protection Bureau (CFPB) announced a lawsuit (enforcement action) against Navient. The CFPB seeks injunctive relief, restitution to borrowers, refunds, damages, and civil money penalties. The state attorneys general in Illinois and Washington also filed lawsuits against Navient. Fitch believes the enforcement action against Navient creates an additional layer of uncertainty, which includes not only the potential monetary restitution to borrowers and fines, but the potential reputational risk an adverse judgement could have on current and future client relationships, particularly government contracts. The senior unsecured debt ratings are equalized with Navient's IDR. The equalization reflects the availability of sufficient unencumbered assets, which Fitch believes enhances Navient's financial flexibility. The Stable Outlook reflects the company's ability to continue to access the unsecured debt and ABS markets at a reasonable cost, maintenance of strong liquidity levels commensurate with upcoming debt maturities, appropriately manage credit risk on private student loans, and moderate demand on capital and liquidity from new business initiatives. RATING SENSITIVITIES - IDR AND SENIOR DEBT Fitch believes positive rating momentum is limited in the near term. However, sustained access to the unsecured debt markets at a reasonable cost, meaningful improvements in core fee-business growth and operating performance, a demonstrated ability to successfully launch and grow new businesses that enhance Navient's earnings capacity, and continued moderation in shareholder distributions could support positive ratings momentum longer term. In the near term, Navient's primary negative rating sensitivity relates to the emerging refinance risk associated with its elevated debt maturities in 2018-2020. An inability to further address refinancing risk via increased liquidity, repurchase/repayment of existing debt, and/or moderated shareholder distributions, could have negative rating implications. Longer term, negative ratings momentum could develop from an inability to access the capital markets at a reasonable cost, deteriorating credit performance, a weakened capitalization profile, an adverse outcome in the pending CFPB/State attorneys general legal actions against the company that significantly impairs its liquidity and/or future profitability, new and more onerous rules and regulations, declines in fee revenue resulting from a loss of or sustained reduction in key contracts and/or other relationships, or an inability to execute on strategic initiatives that can produce sustainable earnings over time. The senior unsecured debt ratings are primarily sensitive to changes in the Long-Term IDR of Navient. Fitch has affirmed the following ratings: Navient Corporation Inc. --Long-Term IDR at 'BB'; --Short-Term IDR at 'B'; --Senior unsecured debt at 'BB'. The Rating Outlook is Stable. Contact: Primary Analyst Michael Taiano, CPA Director +1-646-582-4956 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jared Kirsch, CFA Associate Director +1-212-908-0332 Committee Chairperson Nathan Flanders Managing Director +1-212-908-0827 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021694 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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