Navient Corp. is planning its second student-loan securitization in excess of $1 billion this year.

The transaction also marks a return to a pool of primarily performing loans through the Federal Family Education Loan Program (FFELP), after two prior transactions consisting entirely of rehab loans that have rebounded from default status.

Navient, the nation’s largest servicer of federally insured student loans, is structuring its sixth student-loan backed series of notes of the year with a three-tiered transaction of Class A notes that have 97% of the principal and interest guaranteed by the federal government.  The aggregate principal balance of the loans in the pool is $1.015 billion, similar in size to its last deal in July.

The 2016-6 notes are split intro tranches of $277 million (Class A-1), $280 million (Class A-2) and $448 million (Class A-3). Each carries preliminary triple-A structured finance ratings by bond rating agency DBRS and Moody's Investors Service, while Standard & Poor’s reserves its ‘AAA’ only for the two tranches atop the P&I waterfall.  

The A-3 notes have a one-notch separation with a ‘AA+’ rating from S&P. The agency explains the disparity through reliance of the notes’ rating on the ‘AA+’ long-term sovereign rating it holds on the U.S. federal government as the loans’ guarantor. (Since August 2011, S&P is the only ratings agency that assigns the U.S. a sovereign rating below triple-A).

The loan pool consists of 179,496 loans from 71,019 borrowers with an average balance of $14,305 – down significantly from Navient’s prior transaction level of $23,552 per collateral loan.

The pool included a larger portion of both subsidized and unsubsidized Stafford loans (54.9%) than in prior deals, but a similar slice of consolidation loans at about 40%. Also included is a 5.1% share of Parent Loan for Undergraduate Students (PLUS).  Unlike its five prior transactions this year, no Supplement Loans for Students (SLS) program loans were included.

The collateral is seasoned with 76.8% of the pool in repayment status and generating cash flow, with the remainder in deferment (9%), forbearance (13.4%) along with a minimal number in grace status.

In Navient’s previous transactions in April and June, the pool collateral consisted entirely of rehab loans that were in prior default status. The new 2016-6 pool contains only 20% as in prior transactions dating back to last year, according to DBRS. Loans are considered rehabilitated with nine consecutive on-time payments.

Also similar to recent Navient transactions, the deal’s payment structure will build overcollateralization to 5.5% of current pool balance. The reserve account is 1.65% of the initial pool balance or $16.8 million at closing, required to be maintained at 1.65% through December 2017 when its decreases to 0.25% of the current pool balance. The reserve has a 0.1% floor of the initial pool balance, or $1.02 million.

DBRS stated it has a cumulative default expectation of 15.9% for both the consolidated and non-consolidated loans, and about 45% for rehab loans. Meanwhile, the default claim reject rate assumed to be just 2%.

Default rates have become a concern for Navient securitizations of late, due to slower repayments that have occurred in recent years after the federal government expanded deferment and forbearance programs and introduced repayment plans tied to borrowers’ income.

In September, Moody’s completed a first round of ratings reviews on $7.7 billion in student-loan securitizations by the company, which was created in a spin-off in 2014 of the Sallie Mae (SML Corp.) loan-servicing arm from Sallie Mae’s consumer banking operations.  

The 2016-6 transaction is expected to close Oct. 20. The deal was underwritten by RBC, JPMorgan, Wells Fargo, Barclays, Goldman Sachs and Credit Suisse.

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