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Navient's Ratings Affirmed by Moody's, Outlook Negative

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Navient Corporation’s NAVI unsecured debt ratings and Corporate Family Rating have been affirmed by Moody's Investors Service as Ba3. Notably, the outlook has been changed to negative from stable.

Reasons Behind Downgrade of Outlook

The key reason behind the outlook downgrade is that Navient has declined to sign a new contract with the U.S. Department of Education (“DOE”) to service federal direct student loans on account of “unfavorable economics”. In Moody's opinion, the loss of the DOE contract might put downward pressure on the company's standalone assessment over the next 12-18 months.

Further, Moody’s considers Navient to be exposed to high social risk in comparison to its peers. Also, the negative outlook is reflective of Moody's assessment that the U.S. economy will contract in 2020 due to the coronavirus crisis, which will have an unfavorable impact on the company’s asset quality and profitability.

Ratings Rationale

Per Moody’s, Navient’s standalone assessment remains unchanged, after considering that the revenues foregone from the DOE contract are only a modest contributor to the bottom line, at present.

The company's Ba3 long-term ratings are reflective of its predictable, but declining earnings and the strong asset quality of the $84.8-billion legacy student loan portfolio. It also takes into account the likelihood that the company will take efforts to counter the decline in net income by growing newly-acquired origination business and continuing to modestly grow business services businesses.

Navient reported net income of $597 million in 2019 and unsecured debt outstanding as of Mar 31, 2020 totaled $9.5 billion compared with total assets of $93.2 billion. Thus, Moody’s believes the company will repay unsecured debt largely from the equity investment in its loan portfolio. Therefore, Navient's greatest risk is considered to be a significant decline in portfolio cash flow resulting from increased loan charge-offs or a shrinking investment portfolio.

Also, Navient’s exposure to several litigation issues amid the heightened regulatory scrutiny over alleged anti-consumer practices in the U.S. student loan industry is a concern. The Consumer Financial Protection Board and several state attorneys general have filed civil suits alleging that the bank violated Federal consumer financial laws in servicing federal and private student loans. Per Moody's, legal costs are expected to be manageable, but costs that materially increase the company's leverage could lead to a rating downgrade.

The ratings agency believes that a large servicing transfer of student loans will be a social risk under its ESG framework, given the increase in regulatory risks. Further, Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety. Affirmation of Navient’s ratings reflects the impact of the increased regulatory risks of a servicing transfer, along with the breadth and severity of the economic shock from the pandemic, and the deterioration in credit quality and profitability it has triggered.

What Can Trigger a Change in Moody’s Ratings?

Though ratings upgrades are less likely in a year’s time due to the negative outlook, rating for Navient can return to stable in case Moody’s feels that any potential unfavorable impact from the current economic environment, as well as the loss of the direct loan servicing contract on the company's financial profile, particularly capital and profitability, were modest or effectively countered.

At the same time, ratings can go down if Navient’s financial performance deteriorates or the value of its investment portfolio declines, for example, from rising delinquencies and defaults on the private student loan portfolio or a large increase in prepayment speeds on the Federal Family Education Loan Program (FFELP) portfolio.

The company’s shares have lost 48.9% in the past year compared with 32.8% decline of the industry.

The stock currently carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Encore Capital Group ECPG has witnessed an upward estimate revision of 34.4% in the last 60 days. Additionally, the stock has declined more than 4% in the past year. It carries a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Bancorp, Inc.’s TBBK earnings estimate for the current year has been revised 3.5% upward over the last 60 days. Its shares have lost 3.1% in the past year. It currently sports a Zacks Rank of 1.

First Foundation Inc.’s FFWM earnings estimate has been revised 2% upward for the current year, over the last 30 days. The company’s shares have rallied around 12% in a year’s time. It also carries a Zacks Rank of 2, currently.

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