October 4, 2017 / 9:12 PM / 8 months ago

Fitch: Navient's 'BB' Rating Unaffected by Acquisition of Earnest

(The following statement was released by the rating agency) NEW YORK, October 04 (Fitch) Fitch Ratings views Navient Corporation's (NAVI) announced $155 million acquisition of online lender Earnest, and the concurrent suspension of its share repurchase program through 2018, as neutral to the company's 'BB' Issuer Default Rating over the Rating Outlook horizon, with the potential for positive rating implications over the longer term. The proposed acquisition of Earnest, an online loan origination platform focused primarily on the student loan refinance market, is the latest in a series of acquisitions announced by NAVI in recent years as it aims to build upon its core servicing competencies and diversify its earnings away from its shrinking student loan portfolio. However, this is the first acquisition of size made outside of NAVI's Business Services segment. From a strategic point of view, Fitch views the acquisition positively, as it accelerates the company's entry into the student loan refinance segment which it began last year through a partnership with a third party, and could also better position the company for a re-entry into the direct private student loan origination business when its non-compete agreement with Sallie Mae expires in January 2019. The acquisition of Earnest also provides NAVI more direct control over the marketing/underwriting/origination process than it currently has in the student loan refinance segment through its partnership with a third party, while also providing the company greater ability to defend its existing loan portfolio which has experienced a sharper increase in prepayments in recent quarters, from third-party lenders. The $155 million acquisition is expected to be funded entirely with existing cash, with the majority of purchase recorded as goodwill. While the increase in goodwill and the initial earnings and cash flow drag from the scaling and integration of Earnest's platform over the course of 2018 is expected to pressure NAVI's tangible equity, tangible net asset, and profitability ratios, Fitch believes this is likely to be temporary and could be more than offset by the capital and liquidity benefits from the company's intention to suspend its share repurchase program through at least the end of 2018. The company's current $600 million share repurchase authorization has $160 million remaining on it, which approximates the acquisition price. While the company's share repurchases have declined in recent years as NAVI's student loan portfolio continues to run off, it still represents a meaningful use of the company's excess liquidity. Consequently, the suspension of the share repurchase program is viewed positively by Fitch as the excess liquidity could be used to further reduce NAVI's debt. Fitch does not expect NAVI's asset quality or funding profile to change meaningfully over the near- to medium-term as a result of this acquisition. Nonetheless, were NAVI's unencumbered asset coverage of unsecured debt to decline below the company's stated target of 1.2x-1.3x for an extended period, it could result in negative ratings pressure. Fitch believes positive rating momentum is likely to be limited for NAVI in the near term as a result of the rating constraints Fitch has highlighted previously, including heightened regulatory and legislative risks, a concentrated business model, longer-term strategic uncertainty, and the refinancing risk on its sizeable 2018-2020 unsecured debt maturities. Although the company's liquidity profile and ability to repay its 2018-2020 debt maturities could be enhanced as a result of the suspension of its share repurchase program, it is uncertain to what extent the new loan origination platform, along with other potential acquisitions, can absorb this excess liquidity, and to what level share repurchases may resume beyond 2018. That said, to the extent management is able to execute on these recent acquisitions and demonstrate an ability to produce meaningful, steady cash flows, it could result in positive rating momentum over a longer-term time horizon. Fitch currently rates NAVI as follows: Navient Corporation Inc. --Long-Term Issuer Default Rating (IDR) at 'BB'; --Short-Term IDR at 'B'; --Senior unsecured debt at 'BB'. The Rating Outlook is Stable. 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