News Column

Fitch Rates Navient Corp 'BB'; Downgrades and Withdraws SLM Corp. at 'BB'

April 30, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BB' long-term Issuer Default Rating (IDR) and a 'B' short-term IDR to Navient Corporation (Navient). Additionally, given that SLM Corporation's (SLM) outstanding unsecured debt issues have been transferred to Navient, Fitch has transferred SLM's senior unsecured debt ratings to Navient at 'BB'. The Rating Outlook is Stable.

Fitch has simultaneously downgraded the long-term IDR and senior unsecured debt ratings of SLM to 'BB' from 'BB+' and downgraded the preferred stock to 'B+' from 'BB-'. The ratings of SLM have subsequently been removed from Rating Watch Negative and the long-term IDR, short-term IDR and preferred stock ratings have been withdrawn. A full list of ratings is provided at the end of this release.

The rating actions follow the reorganization and separation of Navient from SLM which took place on April 30, 2014. Per the terms of the separation, SLM's existing public unsecured debt of approximately $18.3 billion will be assumed by Navient. SLM's existing preferred stock of approximately $565 million will remain an obligation of SLM.

KEY RATING DRIVERS - Navient, IDRs and Unsecured Debt

Navient's ratings are supported by the low risk and predictable cash flow nature of its student loan assets and fee-based businesses, its strong market position and demonstrated servicing track record (as part of its predecessor organization), and appropriate capital and liquidity levels. The ratings are constrained by limited business diversification, long-term strategic uncertainty related to the source of incremental earnings and cash flow to replace those loans that are in run-off, high reliance on the capital markets for funding, potential refinance risk associated with existing unsecured debt, and the potential for new and more onerous rules and regulations.

The vast majority of Navient's $148 billion of assets ($103 billion of FFELP loans and $31 billion of private loans) at Dec. 31, 2013 were in run-off mode, leaving the servicing of federal student loans and other contingency collections as the primary sources of core earnings growth.

Fitch believes Navient's future operating cash flows will be sufficient to service unsecured debt maturities. That said, Fitch believes Navient's ability to meet its debt obligations could become pressured in a scenario where multiple variables are simultaneously stressed. For example, if Navient were to aggressively return capital to shareholders and operate with a marginal cash cushion, followed by a subsequent deterioration in asset quality and dislocation of the capital markets, the company's ability to meet its debt obligations would be greatly reduced.

Navient's executive leadership team has indicated that they intend to seek growth opportunities in adjacent servicing and collection businesses while maximizing the cash flows from the run-off student loan portfolio. Fitch believes new businesses could create additional earnings capacity, but they may also introduce incremental risk. Navient may also purchase private student loans from SLM (e.g. Sallie Mae Bank) to support the brand, which could impact ratings depending on the purchase details (e.g. size and price) and amount of leverage utilized.

KEY RATING DRIVERS - SLM, IDRs and Unsecured Debt

The downgrade of SLM's IDRs and unsecured debt ratings reflect potential execution risk associated with the company's more focused and less diversified business platform, heightened regulatory risk and the potential for new and more onerous regulations, asset quality and competitive dynamics in the student loan industry, and deposit sensitivity in a rising rate environment. The withdrawal of SLM's IDRs reflects a lack of sufficient information to maintain the ratings.

KEY RATING DRIVERS - SLM, Preferred Stock

The downgrade of SLM's preferred stock rating to 'B+' from 'BB-' reflects the rating downgrade of SLM's long-term IDR and maintains the existing two-notch differential between the long-term IDR and preferred stock rating, consistent with Fitch's "Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" criteria published on Dec. 23, 2013. The withdrawal of SLM's preferred stock rating reflects a lack of sufficient information to maintain the rating.

RATING SENSITIVITIES - Navient

Fitch believes positive ratings momentum is limited in the near term. However, demonstrated access to the unsecured debt markets at reasonable costs, meaningful improvements in core fee-business operating performance, portfolio acquisitions on attractive terms which increase future earnings capacity, a demonstrated ability to successfully launch new businesses, and reductions in leverage could support positive ratings momentum longer-term.

Negative ratings momentum could develop from an inability to access the unsecured debt markets on economical terms for refinancing purposes, significant shareholder distributions, deteriorating credit performance, or changes to the current capital allocation methodology which weaken Navient's capitalization profile.

Negative rating momentum could also develop from higher than expected loan prepayment activity, new and more onerous rules and regulations, reductions to unencumbered asset coverage of unsecured debt resulting from changes in asset or derivative values, or from declines in fee earnings resulting from a loss or reduction in key contracts and/or other relationships.

The rating actions are as follows:

Navient Corporation:

--Assign 'BB' Long-term IDR;

--Assign 'B' Short-term IDR;

--Transfer SLM Corporation's 'BB' senior unsecured debt rating to Navient;

The Rating Outlook is Stable.

SLM Corporation:

--Long-term IDR downgraded to 'BB' from 'BB+', removed from Rating Watch Negative and withdrawn;

--Short-term IDR affirmed at 'B', removed from Rating Watch Negative and withdrawn;

--Senior unsecured debt downgraded to 'BB' from 'BB+', removed from Rating Watch Negative and transferred to Navient;

--Preferred stock downgraded to 'B+' from 'BB-', removed from Rating Watch Negative and withdrawn.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--Global Financial Institutions Rating Criteria (January 2014)

--Finance and Leasing Companies Criteria (December 2012)

--Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (December 2013)

--FinCo Deposit Sensitivity to Rising Rates (January 2014)

--Nonbank Financial Institution Interest Rate Sensitivity (January 2014)

--2014 Outlook: U.S. Finance and Leasing Companies (November 2013)

--Fitch Fundamentals Index - U.S. (October 2013)

--Cash Flow Analysis of SLM Corporation Spin-off (July 2013)

Applicable Criteria and Related Research:

Cash Flow Analysis of SLM Corporation Spin-Off

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=713197

Fitch Fundamentals Index - U.S.; Index Trend Analysis 3Q13

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718948

2014 Outlook: U.S. Finance and Leasing Companies (Strong Fundamentals, But Sector Headwinds Persist)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722839

FinCo Deposit Sensitivity to Rising Rates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726196

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Brendan Sheehy

Director

+1-212-908-9138

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Meghan Neenan, CFA

Director

+1-212-908-9121

or

Committee Chairperson

Nathan Flanders

Managing Director

+1-212-908-0827

or

Media Relations

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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