TCW Said to Foil Downgrades on $1.3 Billion of Student Debt

TCW Group Inc. is shielding itself against downgrades looming over bonds tied to U.S. student debt by pushing out maturities on $1.3 billion of the securities it holds.

The money manager entered a pact with Navient Corp. that will extend the due dates on six bonds by as many as 40 years, according to two people with knowledge of the matter. TCW’s agreement with Navient, one of the biggest sponsors of these deals, is the first of its kind and may be replicated by other investors, said the people, who asked not to be identified because the information isn’t public.

TCW spokesman Doug Morris declined to comment.

“We encourage bond investors to reach out so we may work with them to evaluate options for amending trust documents,” Navient spokeswoman Patricia Nash Christel wrote in an e-mail.

The deal gives TCW, which disclosed the bonds in its portfolio as of Oct. 31, a cushion against credit rating companies, which warned this year that slowing repayments are creating the possibility of technical defaults on otherwise sound deals. While the underlying loans were originated by the now-defunct Federal Family Education Loan Program and are backed by the U.S. government, making a typical default virtually impossible, slow repayments mean the bonds could still technically default.

Easy Implementation

One investor, believed to own all the notes, “made the amendments easy to implement,” Brian Ford, an analyst at Barclays Plc, said in Dec. 11 note to clients. He didn’t identify TCW as the investor.

Policies pushed by the Obama administration that were meant to provide relief to struggling borrowers who’d otherwise be scarred by defaults have encouraged more students into delayed repayment programs.

As much as $60 billion of the $170 billion of bonds tied to student-loans originated under the FFEL program face downgrades as companies like Fitch Ratings come up with new criteria for the securities, according to Deutsche Bank AG estimates. The change could result in about 15 percent of AAA rated bonds being cut to below investment grade, according to a Nov. 18 Fitch report.

The problem is unique to loans made before the financial crisis because Congress passed legislation in 2010 that ended government guarantees in favor of direct federal lending for education. Companies like Navient have in recent years acquired large pools of these loans from lenders such as Wells Fargo & Co., which are exiting the business because of regulatory capital constraints.

Simple Approach

TCW’s approach is the simplest and most direct solution to shield bonds from a technical default, but not all deals will be as easy easy to amend, said Ford. Other deals may be held by multiple investors, and all of them may have to agree before terms can be changed.

Fitch described the agreement with Navient as an “effective mitigant to maturity risk” in a statement last week that didn’t identify TCW as the holder of the bonds. The six deals were issued last year and were due as early as 2043. They’ll now mature by 2083.

Navient has taken other steps to minimize the effect on investors should Moody’s Investors Service and Fitch reduce bond ratings. That includes buying out $1.5 billion in higher-risk loans from securitization trusts since 2014.

“It’s certainly disruptive for our investors who own those bonds,” Navient’s Chief Executive Officer Jack Remondi, said at a conference in New York last week. “I would expect that if bonds are downgraded, there’ll be a little bit of a period of digestion here as investors rebalanced their portfolios.”

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