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New $662.2M securitization offers a glimpse into Navient's future


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New $662.2M securitization offers a glimpse into Navient's future

Navient Corp.'s proposed acquisition of Earnest might represent its boldest foray into private education loan refinancing as a stand-alone entity, but an asset-backed securitization that has come to market in recent days underlines the efforts the company previously initiated in that market.

Just 24 hours before announcing the $155 million deal on Oct. 4, a Navient entity filed a notice with the SEC of its first securitization of private student loans since February 2016: a $662.2 million transaction that is especially noteworthy for the composition of its collateral pool.

According to presale reports issued Oct. 10 by S&P Global Ratings and DBRS, private education refinance loans originated by and acquired from College Avenue Student Loans LLC account for 52.3% of the $752.9 million in collateral that backs Navient Private Education Loan Trust 2017-A. The four previous private student loan securitizations sponsored by Navient, including the $488 million Navient Private Education Loan Trust 2016-A, did not include any refinance loans in their respective pools.

The remainder of the pool, as described by S&P Global Ratings and DBRS, consists of private education loans acquired or originated by legacy SLM Corp. entities through undergraduate and graduate, Smart Option, direct-to-consumer, law, masters of business administration, and medical programs. Sallie Mae and Navient completed their separation in April 2014. The weighted-average period of active repayment for those loans totaled 49 months as compared with only 5 months for the refinance loans.

The portion of the pool consisting of the refinance loans bears similarities to Earnest's ABS deals, including the loans' seasoning.

A DBRS presale report for April's $175.3 million Earnest Student Loan Program 2017-A shows that the weighted-average remaining term of the underlying collateral, which consisted entirely of refinance loans, was only 2 months short of the weighted-average original term. The weighted-average borrower FICO score was 775, one point below the weighted-average score for the refinance portion of the Navient pool. The weighted-average FICO score for the balance of the Navient pool was 725.

Navient officials discussed their plans to increase the company's participation in the student loan refinance business in January as they disclosed the acquisition of $225 million of refinance loans during 2016, with most of that amount coming in the final four months of the year.

"We see the potential to play a more meaningful role in this market in 2017," said President and CEO John Remondi at the time.

By the midway point of 2017, Navient's acquisitions of private education refinance loans topped $210 million on a year-to-date basis, Remondi said in August. All told, Navient acquired $6.5 billion of education loans during the first six months of the year, including $3 billion in various types of private education loans and $3.5 billion in Federal Family Education Loan Program paper.

"We see this as a large marketplace," Remondi said during an appearance at an investor conference in September, in reference to private refinance loans. "We look at about $8 billion to $10 billion a year being refinanced in today's marketplace, and these borrowers have excellent credit performance."

Earnest is expected to generate nearly $1 billion of refinance loan production in 2017, and Navient expects it to hold around $500 million in student loan receivables as of the time of the deal's closing. S&P Global Market Intelligence estimated that Earnest's originations from its inception through June 30, 2017, approached $1.9 billion.

DBRS characterized the credit quality of the College Ave refinance loan portion of the Navient deal as "strong," and it noted that 48.6% of those loans had been made to borrowers who had obtained a graduate degree. The historical default rates for that type of borrower are "much lower" than those for undergraduates, DBRS said.

At the same time, the rating agency cautioned that College Ave has limited experience and operational history in the student loan space and its loans have yet to be tested in an economic downturn.

Though Navient has not divulged the identity of those entities from which it has acquired refinance loans, College Ave's participation should not come as a surprise. The company's co-founder, Chairman and CEO Joseph DePaulo spent several years as an executive at Sallie Mae through the time of the split.

S&P Global Ratings issued preliminary ratings of AAA(sf) to the $339 million of class A-1 notes, $123.2 million in class A-2A notes and $123.2 million in class A-2B notes. The $76.8 million in class B notes have been assigned a preliminary rating of A(sf).