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Navient poised for growth with Earnest as noncompete with Sallie Mae nears end

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Navient poised for growth with Earnest as noncompete with Sallie Mae nears end

Navient Corp. is looking to tap into the student loan refinancing space as it nears the final year of a noncompete agreement with its former parent company.

Navient on Oct. 4 said it agreed to acquire education-focused digital lender Earnest Operations LLC for $155 million in cash. The bid marks a major push into refinancing student loans even as the company faces another 15 months under the noncompete agreement with Sallie Mae, which is set to end in January 2019. The bid may prove to aid the company in its return to the in-school student loan business, analysts said.

"[Earnest] gives Navient a great platform to work with, something they didn't have," Wedbush Securities analyst Henry Coffey said in an interview. "Refinance is a part of the new normal."

Since its 2014 spinoff from Sallie Mae, Navient has managed its exodus from private education loan originations by acquiring various student loan portfolios, including those of JPMorgan Chase & Co. and Wells Fargo & Co. Navient reported that it held $24.2 billion in private education loans as of June 30, down slightly from $24.7 billion a year earlier.

Acquiring Earnest would provide Navient with a new revenue stream, as the online lender is expected originate $1 billion in student-loan refinancings in 2017. The company is one of several digital lenders, such as CommonBond Inc. and Social Finance Inc., that have been looking for partnerships, acquisitions or other means of growth.

Navient's interest in the student loan refinancing space has been well known for some time. President and CEO John Remondi in July said the company had acquired more than $210 million in refinancing loans in 2017 and planned to "ramp up our acquisitions over the balance of the year."

Remondi believes the company is poised to succeed in the refinancing space given its data, history and reputation with customers, he said during Navient's second-quarter conference call. The CEO doubled down in September, saying Navient could "generate and acquire significant volume in the space" at the Barclays Global Financial Services Conference.

"We believe that this activity will help accelerate the foundation, or help us build the foundation, to re-enter the in-school originations market in January of 2019," he said at the time.

But Navient has also encountered heavy criticism in 2017. For example, a day after the Earnest deal was announced, Pennsylvania's attorney general filed a lawsuit against the company and one of its subsidiaries for what he called "unfair and deceptive lending" practices. Navient is also facing lawsuits from the Consumer Financial Protection Bureau and the states of Illinois and Washington.

The company, which called Pennsylvania's allegations "completely unfounded," saw its stock fall 14.19% to $12.60 on Oct. 5.

The stock price's plunge was likely caused by a mix of factors, including the lawsuit and the company halting share repurchases, Wedbush's Coffey said. To help fund the possible deal, Navient plans to suspend share buybacks through the end of 2018, prompting Compass Point Research & Trading LLC analyst Michael Tarkan to downgrade the company to a "neutral" rating from "buy."

The bid for Earnest is expected to be dilutive to Navient's 2018 GAAP EPS by 8 cents to 10 cents, and accretive to the company's GAAP EPS by the second half of 2019, Navient said.

"While we now view 2018 as more of a transition year, the move does position Navient well to kick-start origination growth — at scale — with refinance originations building in 2018 and in-school originations ramping up in 2019 following the expiration of the noncompete," Tarkan wrote in his Oct. 5 note.

In a statement, Sallie Mae spokesperson Rick Castellano said that, under the noncompete agreement, Navient and any of its companies, which would include Earnest if the deal is approved, "are prohibited from consolidating Sallie Mae loans." A Navient spokesperson did not respond to requests for comment.

Analysts overall see the deal for Earnest is a gain for Navient as it moves closer to the end of the agreement.

"At this price, I think they made a good deal," Wedbush's Coffey said. "It's up to them to prove it's going to be accretive sooner than we think."