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been removed from Rating Watch Negative and the long-term IDR, short-term IDR and preferred stock ratings have been withdrawn.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
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
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.
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
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:
--Assign 'BB' Long-term IDR;
--Assign 'B' Short-term IDR;
The Rating Outlook is Stable.
--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
--Global Financial Institutions Rating Criteria (
--Finance and Leasing Companies Criteria (
--Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (
--FinCo Deposit Sensitivity to Rising Rates (
--Nonbank Financial Institution Interest Rate Sensitivity (
--2014 Outlook: U.S. Finance and Leasing Companies (
--Fitch Fundamentals Index - U.S. (
--Cash Flow Analysis of SLM Corporation Spin-off (
Cash Flow Analysis of SLM Corporation Spin-Off
Fitch Fundamentals Index - U.S.; Index Trend Analysis 3Q13
2014 Outlook: U.S. Finance and Leasing Companies (Strong Fundamentals, But Sector Headwinds Persist)
FinCo Deposit Sensitivity to Rising Rates
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Finance and Leasing Companies Criteria
Global Financial Institutions Rating Criteria
Source: Fitch Ratings
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