Navient’s next student loan securitization is backed entirely by federally guaranteed loans to borrowers who were once in arrears but are now making timely payments.

Navient Student Loan Trust 2016-4 will issue a single, $520 million tranche of securities with preliminary ‘AAA’ ratings from DBRS.

The bonds will be backed by a mix of rehabilitated Federal Family Education Loan Program loans, including unsubsidized Stafford loans (23.7%); subsidized Stafford loans (22.5%); unsubsidized consolidation loans (28.4%); subsidized consolidation loans (21.6%); PLUS loans (3.7%); and SLS loans (0.3%).

By comparison, only 20% of the loans backing Navient’s previous FFELP securitization, completed just last week, was were rehabilitated.

Like Navient’s recent deals, the pool of loans is geographically diverse. The biggest exposure is to California (14.7%), followed by Florida (8.3%), and Texas (7.3%). By comparison, the previous deal’s biggest exposure was to Pennsylvania.

While rehab loans benefit from the same guarantee as non-rehab loans, they have historically exhibited much higher cumulative defaults and default quicker, according to DBRS. This increases the liquidity risk of the transaction, as cash flows may be interrupted 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 DBRS, is the fact that the government tends to reject fewer reimbursement claims for defaulted rehab loans.

The bonds benefit from credit enhancement, primarily in the form of overcollateralization. At the time of issuance, assets in the collateral pool will exceed the balance of notes issued by the trust by $23,746,517, resulting in a parity level of 104.57%.

Also, any interest received in excess of interest paid on the notes will be used to pay down note principal until the overcollateralization level reaches the greater of 5.50% of the adjusted pool balance or  $5 million. After the target is reached, available funds may be released from the securitization trust.

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