Navient Student Loan Trust

Transcription

1 Presale: Navient Student Loan Trust Primary Credit Analyst: Mark W O'Neil, New York (1) ; mark.o'neil@standardandpoors.com Table Of Contents $1.11 Billion Student Loan-Backed Notes Series Rationale Transaction Summary Payment Structure Transaction Overview Pool Analysis Standard & Poor's Expected Default Rate: 13.0%-14.0% Cash Flow Modeling Assumptions And Results 'AA+' And 'A' Stressed And Liquidity Cash Flow Results Credit Stability Cash Flow Analysis Navient Solutions Inc. Navient Funding LLC Related Criteria And Research FEBRUARY 29,

2 Presale: Navient Student Loan Trust $1.11 Billion Student Loan-Backed Notes Series This presale report is based on information as of Feb. 29, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings As Of Feb. 29, 2016 Class Preliminary ratings(i) Preliminary amount (mil. $) Interest rate(ii) A AA+ (sf) 1,081.0 One-month LIBOR plus a spread B A (sf) 29.0 One-month LIBOR plus a spread (i)the rating on each class of securities is preliminary and subject to change at any time. (ii)the interest rates will be determined on the pricing date. Profile Expected closing date March 10, Collateral A pool of student loans that are at least 97% reinsured by the U.S. federal government. Sponsor, master servicer, and administrator Navient Solutions Inc. Subservicers Pennsylvania Higher Education Assistance Agency and Great Lakes Educational Loan Services Inc. Depositor Navient Funding LLC. Seller Navient Credit Finance Corp. Eligible lender trustee and indenture trustee Wells Fargo Bank N.A. Owner trustee Wells Fargo Delaware Trust Co. N.A. Underwriter J.P. Morgan Securities LLC. Rationale The preliminary ratings assigned to Navient Student Loan Trust 's (the trust's) Federal Family Education Loan Program (FFELP) student loan-backed notes series reflect our view of: The transaction's expected initial class A (senior) and total parities of approximately % and %, respectively. The senior parity is defined as the percentage of total assets (the pool balance and reserve account) divided by the class A note principal amount. The total parity is defined as the percentage of total assets divided by the class A and B note amounts. The approximately 2.61% subordination available for the class A notes (subordination defined as the class B note balance divided by the total note balance. The reserve account, which equals 1.25% of the initial pool balance ($13,837,093) at closing and is required to be maintained at 1.25% of the current pool balance until April 2024 and April 2036, when the reserve requirement decreases to 0.80% and 0.25% of the current pool balance, respectively. The reserve has a floor equal to 0.10% of the initial pool balance ($1,106,967). FEBRUARY 29,

3 The transaction's payment structure, which builds overcollateralization to the greater of 1.50% of the current pool balance, or 0.45% of the initial pool balance ($5,000,000), from 0.96% at closing (overcollateralization is defined as the excess of the pool balance and the reserve over the total notes, divided by the pool balance plus the reserve balance). The U.S. federal government's reinsurance of at least 97% of the loans' principal and interest. The timely interest and principal payments made by the legal final maturity date in the cash flow runs that simulated our 'AA+' and 'A' threshold rating credit stress and liquidity scenarios (see the 'AA+' And 'A' Stressed And Liquidity Cash Flow Results section below). A credit stability scenario analysis, which indicates that under moderately stressful economic conditions (defined as approximately 2.25x the expected defaults), the 'AA+' rating would not decline more than one and three rating categories in the first and third years, respectively, and that the 'A' rating would not decline more than two and three rating categories in the first and third years, respectively (see the Credit Stability Cash Flow Analysis section below). The transaction's legal structure. On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign rating on the U.S. to 'AA+' from 'AAA'. The preliminary rating on the series notes partially relies on the long-term sovereign rating on the U.S. federal government because the U.S. Department of Education (ED) supports FFELP loans, which secure the series notes. We view the ED as an integral part of the U.S. federal government (see "U.S. Government Support In Structured Finance And Public Finance Ratings," published Dec. 7, 2014). The ED supports the series notes by reinsuring at least 97% of the principal and accrued interest on the defaulted loans and providing special allowance payments (SAP) to loanholders and, in some circumstances, interest rate subsidies to borrowers. Applying these criteria to the proposal supports a preliminary rating on the notes at the U.S. sovereign rating. Transaction Summary The issuer expects to use the transaction's proceeds to acquire approximately $1,106,967,454 (calculated as of Nov. 30, 2015) of FFELP student loans from the depositor. The Navient transaction incorporates the following structural features: The trust will issue 'AA+ (sf)' rated class A and 'A (sf)' rated class B floating-rate LIBOR notes. The initial class A (senior) parity is approximately %, and the class B (total) parity is approximately %. Excess spread, a reserve fund, and overcollateralization provide credit and liquidity support. For the class A notes, the class B notes provide 2.61% of subordination. Because the class A and B notes are payable sequentially, the class B notes provide nonamortizing credit support to the class A notes. Overcollateralization, starting at 0.96%, is designed to grow to the greater of 1.50% of the then-current adjusted pool balance or 0.45% of the initial pool balance ($5,000,000). Overcollateralization is the excess of the adjusted pool balance and the reserve, over the total debt. The $5,000,000 component of the target provides a nonamortizing overcollateralization floor to the transaction. When the floor is reached, overcollateralization will grow as a percentage of the amortizing loan balance. Excess spread will be used to retire notes until the overcollateralization target is reached. After meeting this target, if prior to Jan 2036, the transaction structure pays certain trustee and carryover servicing fees, then funds may be released. If after Jan. 2036, all excess spread will be used to retire notes. The reserve fund, which will initially be fully funded at 1.25% of the pool balance ($13,837,093), must be maintained FEBRUARY 29,

4 at 1.25% of the current pool balance until April 2024, at which time it reduces to 0.80% of the current balance. The reserve fund again reduces in April 2036 to 0.25% of the current pool balance. The trust may replenish the reserve account balance to the required level on each distribution date if any funds remain after the first four items in the payment waterfall are paid. The funds in the reserve account will generally be available to pay servicing and administration fees and the notes' timely interest and principal on the legal final maturity date. As the collateral pays down, the reserve fund will decrease until it reaches the required floor amount of 0.10% of the initial pool balance ($1,106,967). The reserve fund floor will provide additional liquidity and credit support during the transaction's later stages. The loan pool consists of 100% consolidation loans, with a de minimis amount of Stafford loans. The collateral is seasoned with 85.0% of the pool in repayment status and generating cash flow, and the remaining obligors are either in deferment (6.0%) or forbearance (8.9%). Because of a Dec. 23, 2011, amendment to the Higher Education Act, Navient converted the index for calculating SAP for its FFELP loans disbursed after Jan. 1, 2000, to the one-month LIBOR index from the three-month commercial paper rate, effective April 1, As a result, virtually the entire pool has a SAP interest rate index of one-month LIBOR. Because the series notes will be priced at a spread above one-month LIBOR, we believe there is virtually no basis risk between the yield on the loans and the note interest rate. Pennsylvania Higher Education Assistance Agency (PHEAA) and Great Lakes Educational Loan Services, Inc. (Great Lakes) will subservice the loans under a servicing contract with Navient Solutions Inc. Both subservicers have extensive FFELP servicing experience, as well as historically low servicer reject rates. Payment Structure The class A and B notes are floating-rate notes indexed to one-month LIBOR. The trust will make payments on the notes from collections on a pool of FFELP student loans on the 25th day of each calendar month or the following business day beginning in April The trust will make the payments in a specified priority (see table 1). The student loans were purchased by Navient Credit Finance Corp. in a negotiated transaction from an unaffiliated third party. Table 1 Payment Waterfall Priority Payment(i) 1 Primary servicing fee to the master servicer(ii). 2 Administration fee to the administrator. 3 Interest payments to the class A noteholders. 4 Interest payments to the class B noteholders. 5 If necessary, replenish the reserve account to the required level. 6 Principal distribution amount to the class A noteholders sequentially until paid in full(iii). 7 Principal distribution amount to the class B noteholders until paid in full(iii). 8 On or after Jan 2036, to the class A noteholders sequentially; and then to the class B noteholders, until paid in full. 9 Trustee fees and expenses that have not been paid according to footnote(i). 10 Carryover servicing fee to the master servicer. 11 If the trust loans are not auctioned at the earliest auction date, remaining amounts to the class A noteholders sequentially; and then to the class B noteholders, until paid in full. 12 To Navient Corp., repay all accrued interest on and the unpaid principal amounts borrowed under the revolving credit agreement. 13 Any remaining amounts to the excess distribution certificateholder. FEBRUARY 29,

5 Table 1 Payment Waterfall (cont.) (i)if the depositor or the administrator does not pay the fees and expenses owed to the indenture trustee, eligible lender trustee, and owner trustee due under separate agreements, the indenture trustee is permitted to reimburse itself and the other trustees up to $150,000 per year before making any payments under items 1-13 in the payment waterfall. In our cash flow scenarios, we modeled the payment of these fees at 1/12th of $150,000 per month at the top of the waterfall. (ii)the monthly primary servicing fee will equal $4.25 per loan, per month, subject to a monthly maximum amount equal to 1/12th of 0.90% and 1/12th of 0.50% of the outstanding non-consolidated and consolidated loan principal balances, respectively. (iii)the regular principal distribution amounts (items 6 and 7 in the payment waterfall) are designed to build the notes' overcollateralization amount to the target of 1.50% of the current pool balance from approximately 0.96% at closing. Additionally, the target overcollateralization is subject to a floor of $5,000,000. The trust's servicer may purchase all remaining trust student loans when the pool balance is equal to or less than 10% of the initial pool balance at a price sufficient to repay in full the notes' outstanding principal amount together with the accrued interest. If the servicer does not exercise its purchase option, the indenture trustee may attempt to auction the remaining loan portfolio at a price sufficient to repay the outstanding notes in full together with the accrued interest. On the closing date, the trust will enter into a revolving credit agreement with Navient Corp. as lender, under which Navient Corp. will have the option to lend funds to the trust in the event that available funds are not sufficient to pay the outstanding principal balance of any class of notes on its related final maturity date. Transaction Overview According to the purchase agreements, Navient Credit Finance Corp. (the seller) will sell the loans to Navient Funding LLC (the depositor), which will then sell the loans to the issuing trust (see chart 1). In rating this transaction, Standard & Poor's Ratings Services will review the legal matters that it believes are relevant to its analysis, as outlined in its criteria. FEBRUARY 29,

6 Pool Analysis The notes will receive payments primarily from collections on a FFELP loan pool. Consolidation loans constitute essentially all of the pool (approximately 100.0%) with a de minimis amount of Stafford loans. The pool is seasoned with 85.0% of the pool in active repayment status (see table 2 for the transaction's loan pool characteristics as of Nov. 30, 2015). Table 2 Series Loan Pool Characteristics Navient Student Loan Trust Aggregate outstanding principal balance ($) 1,106,967, ,635, ,722,180 No. of borrowers 18,259 49,363 71,432 Avg. outstanding principal balance per borrower ($) 60,626 15,247 13,897 FEBRUARY 29,

7 Table 2 Series Loan Pool Characteristics (cont.) Weighted avg. borrower interest rate (%) Weighted avg. remaining term (mos.) SAP indexed to one-month LIBOR (%) Rehabilitated loans (%) Loan type (%) Consolidation Stafford 0.0(i) PLUS/SLS Payment status (%) School Grace Deferment Forbearance Repayment School type (%) Four-year college/graduate Two-year college Proprietary/vocational/technical Unknown/consolidation Delinquency status (%) 0-30 days days days days days days plus days ED reinsurance (%) Servicer (%) Pennsylvania Higher Education Assistance Agency (PHEAA) Great Lakes Educational Loan Services Inc Navient Solutions Inc. N/A (i)less than 0.1%. SAP--Special allowance payments. PLUS--Parent Loans to Undergraduate Students. SLS--Supplemental Loans for Students. ED--U.S. Department of Education. FEBRUARY 29,

8 Standard & Poor's Expected Default Rate: 13.0%-14.0% We used several methods to determine the expected default rates, including a review of state cohort default rates as reported annually by the ED, historical static pool default data, and a comparison of other originators' similar collateral performances. We then adjusted the analysis to reflect the collateral characteristics, such as loan type, state geographical distribution, loan payment status, delinquencies, and seasoning level. Our expected default rate for all of the loans also reflects our assessment of the economy and recently graduated students' employment prospects. Based on our review, our expected cumulative default range for the Navient pool is 13.0%-14.0%. Cash Flow Modeling Assumptions And Results We modeled the Navient transaction to simulate stress scenarios that we believe are commensurate with the assigned preliminary ratings (see tables 3 and 4). Table 3 Stressed Cash Flow Modeling Assumptions For 'AA+' Scenarios Preliminary rating AA+ (sf) Cumulative default rate (%) 45.0 Cumulative default timing (fast curve)--consolidation loans (approximate % per year) 25/25/20/10/10/10 Cumulative default timing (slow curve)--consolidation loans (approximate % per year) 20/20/20/10/10/10/10 Cumulative default timing (fast)--nonconsolidation loans (approximate % per year) 40/30/20/10 Cumulative default timing (slow)--nonconsolidation loans (approximate % per year) 20/20/20/10/10/10/10 Servicer claims rejection rate (%) 3.0 Voluntary prepayment rate per year (% CPR)--consolidation loans Voluntary prepayment rate per year (% CPR)--nonconsolidation loans Deferral (% per year) Forbearance (% per year) 4/5/6/7/8/9 for the remaining life 30/25/20 for the remaining life 9/9/9/9(i) 13/13/13(ii) Delay after default of ED claim reimbursement (mos.) 21 Delay of receipt of SAP and interest-rate subsidy (mos.) 2 (i)as loans enter repayment, 9% of their aggregate amount goes into deferment status for four years. (ii)as loans enter repayment, 13% of their aggregate amount goes into forbearance status for two years. CPR--Constant prepayment rate. Table 4 Stressed Cash Flow Modeling Assumptions For 'A' Scenarios Preliminary rating Cumulative default rate (%) 34.0 Cumulative default timing (fast curve)--consolidation loans (approximate % per year) 25/25/20/10/10/10 Cumulative default timing (slow curve)--consolidation loans (approximate % per year) 20/20/20/10/10/10/10 Cumulative default timing (fast)--nonconsolidation loans (approximate % per year) 40/30/20/10 Cumulative default timing (slow)--nonconsolidation loans (approximate % per year) 20/20/20/10/10/10/10 Servicer claims rejection rate (%) 2.5 Voluntary prepayment rate per year (% CPR)--consolidation loans Voluntary prepayment rate per year (% CPR)--nonconsolidation loans Deferral (% per year) A (sf) 3/4/5/6/7/8 for the remaining life 25/20/15 for the remaining life 9/9/9/9(i) FEBRUARY 29,

9 Table 4 Stressed Cash Flow Modeling Assumptions For 'A' Scenarios (cont.) Forbearance (% per year) 13/13/13(ii) Delay after default of ED claim reimbursement (mos.) 21 Delay of receipt of SAP and interest-rate subsidy (mos.) 2 (i)as loans enter repayment, 9% of their aggregate amount goes into deferment status for four years. (ii)as loans enter repayment, 13% of their aggregate amount goes into forbearance status for two years. CPR--Constant prepayment rate. We based the interest rates for the cash flow scenarios on the one-month LIBOR interest rate paths in our criteria (see "U.S. Interest Rate Assumptions Revised for May 2012 And Thereafter," published April 30, 2012). Each rating scenario employs both an up, down, and forward interest rate path (see chart 2). Chart 2 'AA+' And 'A' Stressed And Liquidity Cash Flow Results We stressed the cumulative default rates for the pool at approximately 45.0% and 34.0% according to the assigned preliminary 'AA+ (sf)' and 'A (sf)' ratings, respectively. Timely interest and principal payments for each respective class of notes were made under these stressed cash flow modeling scenarios. FEBRUARY 29,

10 The primary risk in a student loan transaction consisting of FFELP loans is the guarantor's and the ED's rejection of reimbursement claims for noncompliance with servicing standards. Rejected claims lose both the guarantor's and the ED's insurance coverage, resulting in full principal loss to the issuer related to the rejected loans. In evaluating this risk, we used information regarding historical servicer claims payments and rejection rates. We then adjusted the data for the rating as we considered appropriate. We also stressed the recovery lags and the deferment and forbearance periods in our cash flow scenarios. Under these stressed cash flow scenarios, the transaction paid timely interest and note principal by the legal final maturity date. In addition, we ran cash flow scenarios that had zero prepayments and zero default rates, as well as zero prepayments and an expected level of default rates with fast and slow default curves (we left all other 'AA+' assumptions unchanged) to ensure that all of the notes are retired by their maturity dates. Credit Stability Cash Flow Analysis In addition to the 'AA+' and 'A' stressed cash flows, we ran cash flow scenarios to assess the assigned preliminary ratings' stability under moderate stress conditions (a 'BBB' stress scenario). We assumed moderate stresses for cumulative defaults of approximately 2.25x our expected base-case cumulative default assumptions, coupled with slightly less stressful servicer claims rejection and voluntary prepayment assumptions than in the stress runs (see table 5 and charts 3 and 4). Table 5 Sensitivity Cash Flow Modeling Assumptions Cumulative default rate (%) 31.0 Cumulative default timing (fast curve)--consolidation loans (approximate % per year) 25/25/20/10/10/10 Cumulative default timing (slow curve)--consolidation loans (approximate % per year) 20/20/20/10/10/10/10 Cumulative default timing (fast)--nonconsolidation loans (approximate % per year) 40/30/20/10 Cumulative default timing (slow)--nonconsolidation loans (approximate % per year) 20/20/20/10/10/10/10 Servicer claims rejection rate (%) 2.0 Voluntary prepayment rate per year (% CPR)--consolidation loans Voluntary prepayment rate per year (% CPR)--nonconsolidation loans Deferral (% per year) Forbearance (% per year) 2/3/4/5/6/7 for the remaining life 20/15/10 for the remaining life 9/9/9/9(i) 13/13/13(ii) Delay after default of ED claim reimbursement (mos.) 21 Delay of receipt of SAP and interest-rate subsidy (mos.) 2 (i)as loans enter repayment, 9% of their aggregate amount goes into deferment status for four years. (ii)as loans enter repayment, 13% of their aggregate amount goes into forbearance status for two years. CPR--Constant prepayment rate. FEBRUARY 29,

11 Chart 3 FEBRUARY 29,

12 Chart 4 In the sensitivity scenarios, senior parity begins at approximately 103.7%, decreases slightly to approximately 102.9% after several months, and then rises steadily thereafter for the life of the transaction. The subordinate parity begins at approximately 101.0%, and decreases slightly to approximately 100.2% after several months. Depending on the interest rate scenario, the subordinate parity remains steady for four to seven years, and then rises steadily thereafter for the life of the transaction. Based on these scenario results, the federal guarantee of at least 97% on the collateral, the relatively stable servicer rejects in this asset type, and the stresses applied to the reimbursement lags, we expect our rating on the class A notes will not decline more than one and three rating categories in the first and third years, respectively. We expect our ratings on the class B notes would not decline more than two and three ratings categories in the first and third years, respectively (see "Methodology: Credit Stability Criteria," published May 3, 2010). Navient Solutions Inc. Navient Solutions Inc. (Navient Solutions) acts as the sponsor of Navient Corp.'s (Navient's) student loan securitization program. Navient Solutions is a wholly owned subsidiary of Navient and acts as the principal management company FEBRUARY 29,

13 for most of Navient's business activities. Navient Solutions' servicing division manages and operates the loan servicing functions for Navient and its affiliates. Navient Solutions acts as administrator for each trust sponsored by the depositor and its affiliates. Navient Solutions services the vast majority of student loans owned by Navient and its affiliates through its loan servicing centers located in Indiana and Pennsylvania. As of Dec. 31, 2014, Navient Solutions (on behalf of Legacy SLM and/or Student Loan Marketing Association have sponsored approximately 156 student loan securitizations involving approximately 122 FFELP student loan transactions and approximately 34 private education loan transactions. Navient Solutions does not own loans. As the sponsor and administrator of the company's student loan securitization program, Navient Solutions selects portfolios of loans owned by its affiliates to be sold to the trust and structures each transaction. Under a servicing agreement, Navient Solutions, as master servicer will be responsible for servicing, maintaining custody of and making collections on the trust student loans. Navient Solutions has entered into separate subservicing agreements with Great Lakes and PHEAA and will oversee each subservicer's performance of its servicing obligations with respect to the trust student loans. Navient Funding LLC Navient Funding LLC will be the depositor. The depositor is a special-purpose entity created to perform limited activities for the loan securitization program, including transferring loans from Navient Credit Finance Corp. and the other loan sellers to the issuing trusts. Related Criteria And Research Related Criteria Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction, May 29, 2015 Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015 U.S. Government Support In Structured Finance And Public Finance Ratings, Dec. 7, 2014 Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014 Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 U.S. Interest Rate Assumptions Revised For May 2012 And Thereafter, April 30, 2012 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009 Legal Criteria For U.S. Structured Finance Transactions: Appendix III: Revised UCC Article 9 Criteria, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Criteria Related To Asset-Backed Securities, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Securitizations By Code Transferors, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Securitizations By SPE Transferors And Non-Code Transferors, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006 Student Loan Criteria: Evaluating Risk In Student Loan Transactions, Oct. 1, 2004 Student Loan Criteria: Structural Elements In Student Loan Transactions, Oct. 1, FEBRUARY 29,

14 Student Loan Criteria: Rating Methodology For Student Loan Transactions, Oct. 1, 2004 Related Research Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Overview Of Legal Criteria For U.S. Structured Finance Transactions, Oct. 1, 2006 The Rating Process For Student Loan Transactions, Oct. 1, 2004 In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, FEBRUARY 29,

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