Stressed Out: Will Navient Cause the Student Debt Bubble to Pop?

 | Jan 29, 2016 | 10:00 AM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

No list of "Stressed Out" companies would be complete without a mention of what many believe will be the next bubble to burst: student loans.

Navient (NAVI) is a Delaware-based education loan manager which was spun off from Sallie Mae -- more formally known as SLM Corporation (SLM) -- in 2014. Shares of Navient are down 54% over the last year and currently trade around $9.

Earlier this week, Navient reported earnings per share of $0.48, narrowly missing analyst consensus of $0.49. However, revenue was a different story. It fell by 12.7% over the last year and net interest income -- an important metric for a lender -- decreased 16.7%. The decline in net interest income was due in part to what the company called a "timing mismatch" in prime-based earning assets against debt that was indexed to rising LIBOR rates.

CEO John Remondi addressed concerns about a looming student loan bubble in a call with analysts:

"Headlines covering student loans have created storylines that lead one to believe that most student loan borrowers have an overwhelming debt burden that cannot be met. That's far from the typical experience. For example, 85% of our federal loan customers are current. Still some student loan borrowers do have more debt than they can reasonably afford. This is usually due to dropping out before they earn their degree, taking six years or more to complete their degree, or paying more than the degree is worth."

Navient currently has five Buy ratings, two Hold ratings, and zero Sell ratings, according to a Bloomberg survey of analysts.

Despite the bullish outlook on the sell-side, others have taken a less sanguine view of Navient's prospects. The company has a Ba3 rating by Moody's, which places it relatively deep into "junk" territory. Among the risks Moody's sees that are unique to Navient: the company has $16 billion in unsecured debt and just over half of it is due to mature over the next four years.The credit rating agency believes that Navient will have to refinance a portion of that debt.

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Moody's also takes issue with Navient's Federal Family Education Loan Program ABS Trusts. It has separately put the FFELP securitizations on review for downgrade in June 2015, but it has not yet completed its review. FFELP was a government-sponsored student loan program that ended with the Health Care and Education Reconciliation Act of 2010.

"The repayment rates on the FFELP term ABS trusts are slowing because a growing number of borrowers are opting for income-based repayment plans, and the number of loans in deferment and forbearance remains high," Brian Harris of Moody's said in August.

According to Navient's earnings release, $96.5 billion of its loans are FFELP loans, while $26.4 billion are private loans.

Student loans are likely to get increased attention during the 2016 election cycle, as the image of the over-educated, under-employed, heavily-indebted college grad has become a popular trope.

Furthermore, sentiment could turn into action, which would compress Navient's bottom line. While Goldman Sachs has a Buy rating on Navient, it noted "margin compression, credit costs, regulatory and political risks" as challenges to its forecasts.

The lending business is -- almost by definition -- prone to risk, but student loans are garnering special attention. Navient's looming unsecured debt maturities coupled with the perceived and real risks of the student loan market could spell trouble.

For more on Real Money's 20 distressed companies to watch:

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