Navient's Stock Tailspin Could Spell a Discount Opportunity

 | Dec 28, 2015 | 5:00 PM EST
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It appears the new year cannot come fast enough for Navient (NAVI), the embattled student-loan manager whose shares have tanked nearly 47% throughout 2015.

The Wilmington, Del.-based corporation was hit particularly hard on Monday when shares were sent into a tailspin following the public filing that new restraints have been placed on Navient's ability to take on more debt at one of its subsidiaries, a development many appear to be interpreting as a sign of a liquidity crunch. 

Yet while investors dump their Navient shares in headline-driven panic, there may now be a discount for shareholders to take part in Navient's long-term value, according to two analysts.

Navient shares dropped more than 9% Monday, after a filing with the Securities and Exchange Commission revealed the amount available under credit facilities held by one of Navient's subsidiaries, HICA Education Loan Corporation, has been slashed by $5.7 billion from the $10.7 billion that was expected earlier this month, according its filing

The amount Navient will be able to draw from HICA's debt facilities, which are backed by collateral approved by the Federal Housing Finance Agency, will further be narrowed to $3.9 billion for debt maturing after October next year.

And while this narrowing credit window could restrict Navient's ability to make large, potentially accretive acquisitions down the road, its Monday share drop appears to indicate an unjustified level of bearishness, according to a report published by Keefe, Bruyette & Woods. 

"In our view, this seems more of a headline impact as we don't think that this event constrains the ability of the company to service unsecured debt, purchase private student loans or execute the share repurchase program as the company still has other means of liquidity from cash flow generation and asset securitizations among other avenues," the Keefe, Bruyette analysts wrote.  

"However, ultimately, we continue to believe that for the shares to reflect the true fundamentals and valuation, there will need to be clarity from the rating agencies, which we expect sometime in the near future," the anlaysts added.

Keefe, Bruyette maintains an Overweight position on Navient, the equivalent of a Buy, and a $21 price target.

And while the reduction in available credit at Navient's subsidiary is an "incremental negative," the new caps should not endanger Navient's ability to make good on its outstanding debts or return value to shareholders, wrote Mark DeVries, an analyst with Barclays.

There may be a "slight risk" in losing favorable profit margins relating to refinancing loans at its subsidiary, but "we do not believe this will have a major effect on the long-term earnings or cash-flow story for Navient," DeVries wrote. 

Among the chief concerns Navient will face moving forward is its significantly high leverage, with a debt-to-equity ratio of about 34:1, Jeremy LaKosh writes in Real Money. Its steep debt burden may even imperil its ability to make dividend payouts, which Navient has historically made at about 34% of its earnings since going public last year, wrote LaKosh.

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