Navient is marketing $1.1 billion of bonds backed by federally guaranteed student loans, according to Moody’s Investors Service.

Navient Student Loan Trust 2016-1 will issue $1.08 billion of floating-rate notes with a legal final maturity of 2070 with a preliminary ‘Aaa’ rating from Moody’s and $29 million of floating-rate notes maturing in 2071 rated ‘A2’.

The portfolio consists of over 99% Federal Family Education Loan Program consolidation student loans and less than 1% FFELP Stafford loans. FFELP loans are reinsured by the Department of Education for at least 97% of defaulted principal and accrued interest. All of the loans are serviced by Navient.

The average indebtedness of the borrowers is $60,624, which is significantly higher than other securitizations of FFELP consolidation loans, according to Moody’s. “A few borrowers defaulting on their high balance loans towards the tail end of the transaction, can lead to a significant spike in defaults,” the rating agency states in its presale report.

A bigger risk, one which is true of all FFELP bond, is that borrowers will take advantage of plans offered by the federal government that can stretch out payments for years.  The deal has a feature common to all recent FFELP transactions to mitigate this risk: on or after January 2036, excess funds will be used to pay down principal sequentially, to the class A and class B noteholders, instead of being released to the certificate holder. This feature accelerates principal payments on the notes, increasing the likelihood that the notes will be paid off by their final legal maturity if the collateral amortizes at a slower rate.

Also, the reserve account requirement is at a minimum of 0.80% of the outstanding pool balance until April 2036, which is a “significantly higher level and longer duration” compared to previous Navient transactions, according to Moody’s.

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