News Analysis

Legal issues weigh on Earnest acquisition




Navient's recent acquisition of Earnest is seen as a bold move, given its ongoing legal challenges (SCI 13 October). While the takeover could lead to a surge in refi student loan ABS from the firm, investors in future transactions may need to consider whether they are buying into additional risks.

Joe Cioffi, partner at Davis & Gilbert, says: "I think it is a bold move from Navient that shows it is undaunted by the ongoing legal troubles hanging over it and is taking a big gamble on the disputes being resolved successfully."

The acquisition also represents a certain degree of risk-taking, particularly given the timing. "Navient might be betting on its success, but it is a strange time to take on stiff competition in the refi market when it is beleaguered by, and could eventually be consumed by, legal action," Cioffi adds.

The acquisition could have a significant impact on the ABS market, particularly as it provides Navient with the chance to originate loans, albeit only refi student loans until 2018, due to a non-compete clause following its split from Sallie Mae. Cioffi suggests that Navient could now be well positioned to harness expertise in the securitisation sector that Earnest lacked and so provide access to a new supply of refinanced student loans to investors through the ABS market.

Cioffi questions whether investors will necessarily find the acquisition cause for celebration, however. "Investors might ask whether they should celebrate the potential for more high-quality refi student loans to come to market or be concerned that Navient's deals come with additional risks, if the loans are subject to the same servicing practices that are at issue in all of the Navient legal actions."

Navient ceo Jack Remondi is believed to have expressed a desire to become the leader in the refi student loan space, currently dominated by SoFi. This may raise the question about whether the sector has the capacity for a firm of Navient's size.

Cioffi believes there is most likely room, however. "The refi student loan market is large and it stretches across all age groups, so there is most likely enough room for Navient to compete with SoFi and smaller lenders that dominate the market. Navient's experience and the halo currently surrounding the refi market will likely support Navient's ambitions, if Navient can put its legal issues to rest and convince investors and consumers it is worthy of their trust."

Separately, Nelnet recently entered into an agreement to acquire Great Lakes Educational Loan Services, making the combined firm the largest servicer of government-owned student loans. Moody's comments that the move is credit negative for Nelnet and for Nelnet and Great Lakes-serviced ABS.

One reason for this, according to Moody's, is that Nelnet intends to maintain distinct brands and separate servicing centres and operational teams. This may be challenging when both firms operate large, complex servicing platforms, which are under significant legislative and regulatory oversight.

Furthermore, "student lenders have had a number of regulatory issues over the years," with the acquisition bringing increased scrutiny to Nelnet, adds Moody's. The rating agency suggests that the acquisition will be subject also to integration risk and there is "uncertainty over Nelnet's ability to drive efficiencies and achieve costs savings," which was a primary driver of the deal.

Moody's suggests that the deal will be credit negative for ABS serviced by Nelnet and Great Lakes backed by FFELP student loans because of the regulatory scrutiny and integration risk. Equally, the rating agency concludes, should the integration be successful, a "steadier" firm may emerge, reducing the likelihood of future servicing disruption.

RB

30/10/2017 17:20:34



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