Student Loan Pains Grip Navient Investors Seeing Funding Squeeze

Debt investors are growing anxious that potential ratings downgrades on billions of dollars of student-loan securities will squeeze Sallie Mae spinoff Navient Corp.

Credit traders have pushed the cost of derivatives protecting against losses on the company’s debt to the highest in three years. Holders of the company’s bonds have lost 6.2 percent this month as prices of the debt plunged, Bank of America Merrill Lynch index data show. Navient is the largest servicer of government-backed student debt.

As more Americans avoid paying down the nation’s $1.2 trillion of outstanding student loans, investors are growing concerned that the turmoil it’s causing for bonds backed by such debt will crimp Navient’s access to one of its sources of funding, said Lea Overby, a credit analyst at Nomura Holdings Inc. Moody’s Investors Service and Fitch Ratings warned in April that they might downgrade large swaths of student-loan bonds -- much of which was issued by Navient -- with some debt rated as high as AAA facing cuts to as low as junk.

“If asset-backed securities get downgrades, does Navient get locked out?” said Overby. “If that happens, the answer is, ‘yes.’”

Nikki Lavoie, a spokeswoman for Navient, declined to comment. The company was spun off in 2014 from Sallie Mae -- formally known as SLM Corp.

Chief Executive Officer Jack Remondi said during a June 22 earnings call with investors that Navient was working with the ratings companies to come up with solutions to protect the bonds and maintain liquidity for those securities.

Swaps Surge

Credit-default swap contracts linked to the company have jumped 232.5 basis points since July 10 to 536 basis points, according to data provider CMA. The net amount of swaps trades outstanding on the company climbed 3.2 percent to $706.1 million in the week ended July 24 , according to Depository Trust & Clearing Corp. data compiled by Bloomberg. That’s the most in six weeks.

The price of the contracts means it would cost the equivalent of $536,000 annually to protect against losses on $10 million of Navient debt for five years.

The company’s $1 billion of 5.5 percent bonds due in January 2023 have dropped 10.5 cents this month to 85.5 cents cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That raised the yield on the debt to 8.1 percent from 6.2 percent in June. The company’s shares have dropped 13.5 percent this month, reaching the lowest in more than a year. They traded Wednesday at $15.75 as of 2:40 p.m. in New York.

Most of Navient’s business consists of investing in and servicing government-guaranteed loans held within asset-backed bonds.

Bond-market analysts across Wall Street see the problem in the securities as largely a technical one, since missed payments would trigger only a legal default. The government guarantees around 97 percent of those loans.

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