As promised, Navient Corp. is picking up the pace of private student loan origination and securitization.

The company’s first offering of bonds backed by refinance loans originated by Earnest, which it acquired in the fourth quarter of last year, is sized at $529.4 million – nearly three times the size of the last deal Earnest completed on its own, in May 2017.

Earnest is a leading lender to borrowers with advanced degrees and high-paying jobs, but it struggled to raise money, reportedly selling itself to Navient at a discount to its valuation.
In a conference call last month, Navient executives noted that the refinance student loans made through Earnest do not require seasoning as new in-school loans, and so can be bundled into collateral for bonds much sooner.

Navient also expects the refinance loans to perform much better than private student loans made to borrowers while they are still in school. It’s projecting cumulative net losses over the lifetime of Earnest’s loans to be under 2%, compared with 6% to 7% for in-school private student loans.

While the new deal, Navient Private Education Refi Loan Trust 2018-A, is much larger, the collateral is roughly similar to that of Earnest’s May 2017 deal. The 7,154 fixed-rate loans have an average outstanding principal balance of $74,350 (versus $71,468), a weighted average annual borrow rate of 5.21% (5.11%), and a weighted average original FICO of 765 (775), according to S&P Global Ratings. However, there has been a shift in the percentage of borrowers in the highest FICO band, 740 and above; these borrowers account for just 73% of the collateral for Navient's deal, down from 83% of Earnest's May deal.

Just under 72% of loans in the latest deal are to borrowers with advanced degrees; the remaining 28.1% have bachelor’s or other degrees.

S&P has a slightly less rosy performance outlook than Navient execs; it expects 3.25% of the loans to default over the life of the deal, in its base-case scenario. Nevertheless, S&P expects to rate the two tranches of senior notes at AAA, which is two notches higher than S&P’s A rating for the senior tranche of the deal Earnest completed last May. S&P's latest presale report does not explain why; however, the presale that it issued on the May transaction cited Earnest's limited operating history and experience as a servicer as factors capping the rating at A. Navient has a much longer operating history and is a much more experienced servicer.

The senior, Class A notes benefit from 12.25% overcollateralization ( the excess of the pool balance over the class A note balance, divided by the pool balance), 8.5% subordination of the Class B notes, and an 0.25% reserve fund.

Barclays Capital, Merrill Lynch, Pierce, Fenner & Smith, Deutsche Bank Securities, and Goldman Sachs are the underwriters.

Issuance of bonds backed by student loans, and refinance loans, in particular, is expected to maintain a brisk pace this year. DBRS, which has rated past Earnest deals but has yet to issue a presale report on Navient Private Education Refi Loan Trust 2018-A, is calling for a 20% increase from the $5.2 billion of refi student loan ABS issued in 2017.

Earnest, which issued four transactions in 2016 (totaling approximately $700 million) but only one in 2017, is in a better position to contribute to the increase now that it is operating under Navient.

However, Social Finance, the largest issuer in the space, beat Navient out of the gate with a $720 million offering of bonds backed by refinance loans two weeks ago. SoFi issued a total of $3.7 billion in 2018, according to DBRS.

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