OREANDA-NEWS. Fitch Ratings has affirmed Navient Corporation's (Navient) long-term Issuer Default Rating (IDR) at 'BB' and short-term IDR at 'B'. The Rating Outlook is Stable. A full list of ratings is detailed at the end of this release.

Navient's rating review was conducted as part of Fitch's periodic peer review of U.S. consumer finance companies. For a summary of the outcomes and drivers of this peer review please see the release titled 'Fitch Affirms Five U.S. Consumer Finance Companies Following Peer Review' dated April 8, 2015.

KEY RATING DRIVERS - IDRs and Senior Unsecured Debt

The rating affirmations and Stable Outlook reflect Navient's strong market position and demonstrated servicing track record (as part of its predecessor organization) in the student loan servicing space, low risk and predictable cash flow nature of its federal student loan assets and fee-based businesses, appropriate risk-adjusted capitalization, adequate liquidity and seasoned management team.

Rating constraints include Navient's concentrated business model, reliance on wholesale funding sources, long-term strategic uncertainty and execution risk associated with generating new earnings and cash flow streams to replace the run-off student loan portfolio, potential refinance risk with existing debt maturities, and continued elevated regulatory, legislative and litigation risk.

The vast majority of Navient's \$146.4 billion of assets (\$41.1 billion of FFELP Stafford loans, \$63.5 billion of FFELP Consolidation loans and \$29.8 billionn of private loans) at Dec. 31, 2014 were in run-off mode, which means federal student loan servicing and other contingency collections are the primary sources of core earnings growth. That said, the student loan portfolio will amortize over an extended period of time which, Fitch believes, will provide the company with adequate time to attempt to execute on its strategic objectives.

As of Dec. 31, 2014, the weighted-average lives of Navient's FFELP Stafford and FFELP Consolidation portfolios were 4.8 years and 9.0 years, respectively, assuming constant prepayment rates (CPRs) of 4% and 3%, respectively. The weighted-average life of the private student loan portfolio was seven years, assuming a CPR of 5% at Dec. 31, 2014.

Navient continues to pursue opportunistic acquisitions of student loan assets to replace portfolio amortization and maintain operating scale. During 2014, Navient acquired \$13 billion in student loan assets including \$11.3 billion of FFELP loans and \$1.6 billion of private loans. Although acquisitions create additional earnings capacity, Fitch believes they could also introduce incremental risk depending on the purchase details (e.g. size and price) and amount of leverage utilized.

Navient's success in growing its existing servicing and collection businesses and expanding into new adjacent businesses has been mixed. The Bipartisan Budget Act which became effective on July 1, 2014, reduced the fees Navient can earn for rehabilitating defaulted FFELP Loans. According to Navient, The Budget Act reduced fee income by approximately \$78 million in 2014.

On Feb. 21, 2015, Navient's contract with the Department of Education (ED) to collect defaulted federal student loans expired and was not renewed. The ED has since issued a request for proposals for similar services and Navient has submitted a bid. However, there can be no assurance that Navient will be awarded a new contract or, if successful, at what terms. In 2014, revenue related to this contract totaled \$65 million, or 2% of total 2014 core earnings net revenue.

Navient's contract with the ED to service federal student loans was extended on Aug. 27, 2014, by five years, through June 2019. The new contract includes revised performance metrics, an updated allocation methodology, and provides incentives for keeping borrowers in good standing and reducing delinquencies. Fitch believes these changes could benefit servicers such as Navient, whose servicing track records align with the revised performance metrics. That said, the potential pool of new DSLP borrowers will be reduced, as the new contract now allocates 25% of new borrowers to not-for-profit servicers. Not-for-profit servicers previously only serviced existing loans. As a result, the four current primary ED loan servicers (Navient, Nelnet, Great Lakes Educational Loan Services, Inc., and the Pennsylvania Higher Education Assistance Agency) will be competing for a smaller allocation than in the past. Navient's current allocation under the ED servicing contract is 24% and the company earned \$130 million of revenue from the contract in 2014, or 5% of total 2014 core earnings net revenue.

Despite these challenges, Navient has continued to pursue its fee-based business growth strategy. On Feb. 25, 2015, Navient announced its acquisition of Gila LLC (commonly known as Municipal Services Bureau, or MSB), an asset recovery and business process outsourcing firm focused on the state and local government market and serving more than 600 clients in 39 states. Navient expects MSB to generate approximately \$70 million in revenue in 2015. Fitch views the acquisition positively as it enhances Navient's earnings capacity and accelerates its growth strategy into the asset recovery business and beyond the education loan markets.

Fitch believes Navient's future operating cash flows will be sufficient to service upcoming unsecured debt maturities. However, Fitch recognizes that 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, and subsequently suffer a deterioration in its asset quality during a period of capital markets dislocation, the company's ability to meet its debt obligations could be greatly reduced.

RATING SENSITIVITIES - IDRs an Senior Unsecured Debt

Fitch believes positive ratings momentum is limited in the near term. However, demonstrated access to the unsecured debt markets at reasonable cost, 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 at favourable 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 of or sustained reduction in key contracts and/or other relationships.

Fitch has affirmed the following ratings:

Navient Corporation Inc.
--Long-term IDR at 'BB';
--Short-term IDR at 'B'
--Senior unsecured debt at 'BB';

The Rating Outlook is Stable.