Xerox Business Services, already one of the smallest student loan servicers, is in an even weaker financial position following the spinoff of its parent company, Conduent, From Xerox Corp., according to Moody’s Investors Services.

In a report published Monday, Moody’s said the split, which was completed Jan. 3, has weakened the durability of the servicing operations under Conduent and increased the likelihood of financial distress of the servicer.

”If such financial distress were to result in a servicing transfer, it might cause disruption in student loan servicing, which in turn could affect performance of the ABS transactions backed by the affected loans,” the report states.

Xerox Business Services is rated Ba3 by Moody’s; it services approximately $1.5 billion of private student loans backing ABS transactions rated by Moody’s.

Student loan servicing is a low margin business that benefits from economies of scale. As one of the smallest servicers, Conduent faces competitive pressures from larger and financially stronger rivals as well as competitors based in lower-cost regions. “It’s also susceptible to weakening pricing trends, which weigh heavily on sales growth prospects, and weak free cash flow metrics in the near term,” the report states.

This risk is more significant for the private student loan ABS serviced by Xerox Business Services than for the FFELP ABS, owing to the relative ease of transferring FFELP loans to another servicer, according to Moody’s. FFELP loans have more standardized servicing platforms than do private student loans. 

A disruption in the servicing of private student loans is more likely to lead to performance deterioration, such as high delinquencies and defaults, which could result in a disruption in cash flows or even losses to holders of student loan bonds.

Moody’s rates 20 private student loan securitizations that with collateral serviced by Xerox Business Services, most of them issued before the financial crisis. The percentage of loans in these transactions that are serviced by Xerox, as opposed to another servicer, ranges from 100% for eight transactions sponsored by Access Group (with vintages ranging from 2002 to 2010 to 0.4% for a 2006 vintage deal sponsored by First Marblehead (National Collegiate Student Loan Trust 2006-3).

Moody’s stopped short of putting any transactions under review for a potential downgrade, however. It noted that private student loan transactions have some mitigants in place that will help offset the increased credit risk, such as the presence of a back-up servicer or high levels of credit enhancement in the transactions.

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