As expected, Navient is preparing another $1.0 billion securitization of federally guaranteed loans that were once delinquent but are now making timely payments.

The deal, Navient Student Loan Trust 2016-5, will issue a single tranche of securities with preliminary ‘AAA’ ratings from Fitch Ratings. The floating-rate notes benefit from credit enhancement of 4.39% and have a final maturity of June 2065.

It is nearly twice as big as the $520 million securitization of rehabbed Federal Family Education Loans that Navient completed in June.

While rehab loans benefit from the same government guarantee of up to 96% of interest and principal as non-rehab loans, they have historically exhibited much higher cumulative defaults and tend to default more quickly, according to Fitch. This makes it more likely that bondholders will experience an interruption of payments when borrowers fall behind on payments. The Department of Education does not make good on principal and interest until bonds actually default.

Partially offsetting this risk, according to Fitch, is the fact that the government tends to reject fewer reimbursement claims for defaulted rehab loans.

Fitch estimates the default rate for the rehab loans will be 48.25%, in its base case scenario, but it expects the Department of Education will reject just 3% of the claims from the trust for reimbursement.

To help offset the risk of rejected claims, the balance of the bonds to be issued is 4.39% greater than the balance of the loans used as collateral.

Also, funds equal to 3.75% of the initial student loan balance will be set aside when the deal closes and will be available to cover interest shortfalls. After December 2017, however, the required reserve account balance falls to 1.5%; it falls again in June 2019 to the greater of 0.25% of the current student loan balance and 0.10% of the initial student loan balance.

Navient executives said last week that the student loan servicer was planning another offering of bonds backed by rehabbed FFELP, and that they expected their funding costs to come down. 

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