Navient's next refi student loan ABS includes floating-rate collateral

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For the first time in almost two years, borrowers are taking out floating-rate loans to refinance their student debt. So Navient Corp. is testing investor appetite for floating-rate bonds backed by refinance loans.

The servicer’s next securitization, Navient Private Education Refi Loan Trust 2019-A, is the first one in almost two years backed by refinance loans that pay a floating rate of interest, though this represents less than 10% of the total collateral. The remainder of the loans pay a fixed rate of interest.

It’s more cost-effective for Navient to finance floating-rate loans by issuing floating-rate bonds – but only if investors are willing to buy them at an attractive price. So the deal includes a single tranche of notes that pay a floating rate of interest; the size of this tranche has yet to be determined, but is unlikely to be larger than $50 million, according to DBRS.

A total of $647 million of notes will be issued in the transaction, and the bulk of them pay a fixed rate of interest. There are three tranches rated triple A by DBRS and S&P Global Ratings: $313.5 million of fixed-rate Class A-1 notes and $271.76 million of Class A-2 notes, to be divided between fixed-rate Class A-2A notes and floating-rate A2B notes. There is also a $61.9 million tranche of fixed-rate Class B notes that are rated AA by DBRS alone.

Merrill Lynch, Pierce, Fenner & Smith, Barclays Capital and RBC Capital Markets are the deal's underwriters.

Floating-rate student loans tend to have lower initial rates than fixed-rate student loans, so they can be attractive to borrowers when prevailing interest rates are expected to hold fairly steady or even fall. But this is precisely when investors are least likely to want to buy floating-rate bonds.

Aside from the exposure to floating-rate loans, the collateral for NAVSL 2019-A is broadly similar to that of Navient’s previous refinance loan securitization, completed in September. The borrowers have a weighted average FICO score of 756 (vs 760 for the prior deal), weighted average income of $134,454 (down from $177,554) and weighted average free cash flow, after expenses, of $4,063 (vs $4,069).

Approximately 62.6% of the pool consists of loans made to borrowers that obtained a graduate degree, virtually unchanged from the September deal, while 32.1% have an undergraduate degree and 5.2% are parents of students. Historically, borrowers with a graduate degree have defaulted at much lower rates than undergraduate students. That’s virtually unchanged from 62.7% for the prior deal, but down from the three prior deals, which had concentrations of 66%, 71.9% and 77.8%.

Of borrowers with graduate degrees, some 28.6% have a medical degree and 13.8% have a law degree, while 14.2% have an MBA.

S&P expects defaults to reach 3.25% of the original principal balance over the life of the deal, in its base-case scenario.

In its presale report, it notes that credit enhancement for the senior notes is higher than that of Navient's previous deal backed entirely by refinance loans. The initial senior overcollateralization increased to 14.00% from 13.70% of the initial pool balance; the initial total overcollateralization decreased to 4.90% from 5.30% of the initial pool balance; and the class B subordination for the class A notes increased to 9.57% from 8.87% of the initial bond balance.

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