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High Loan Originations Aid Navient (NAVI) Amid Low Liquidity

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Navient Corporation’s (NAVI - Free Report) recurring revenue business model, focus on in-school loan originations and strategic acquisitions aid top-line growth. It is an eminent portfolio holder of Private Education Loans and education loans insured or guaranteed under the Federal Family Education Loan Program (“FFELP”). In fact, projected annual cash flows from private education loans and FFELP loans are $4 billion and $6.8 billion, respectively, in the next 20 years.

NAVI’s in-school origination channel was enhanced when Earnest acquired Going Merry, a financial aid platform in September 2021. In 2017, NAVI had acquired Earnest, a financial technology and education-finance company serving consumers unable to get finance from traditional banks. It expects in-school loan origination volumes to be more than double in 2023 from 2022 levels.

Apart from focus on revenue growth, Navient has been undertaking cost-control efforts to improve operating efficiency through data-driven approaches, simplification and automation. Over the years, the company has been witnessing a downtrend in expenses. The declining trend is likely to continue in the near term and aid NAVI’s bottom-line growth.

Navient’s business-risk reduction and simplification efforts bode well. Transferring all its Department of Education (ED) servicing contracts to Maximus in October 2021, it eliminated an operationally-risky business and amplified its focus on domains outside government student-loan servicing.

However, Navient’s top line is under pressure given its limited growth opportunities. After the transfer of ED servicing contract, it lost a major portion of its servicing revenues. Failure to acquire new loans, and develop and expand alternative sources to enhance declining revenues from FFELP loan portfolio is likely to affect its financials in the upcoming period.

As of Mar 31, NAVI’s long-term borrowings of $57.39 billion exceeded its cash and cash equivalents of $570 million. Given such high debt burden, the company does not seem to be well positioned in terms of its liquidity profile.

Also, an unfavorable debt/equity ratio and the payout rate compared with its industry’s average indicate that Navient’s capital deployment activities might not be sustainable in the long term.

Further, the company is exposed to repricing risks related to its loans. Interest earned on FFELP loans are indexed to 1-month LIBOR rates and the private education loans are indexed either to 1-month LIBOR rates or 1-month Prime rate, whereas the cost of funds is primarily indexed to 3-month LIBOR rates. Relatively high interest rates are likely to lower Navient’s floor income, affect margins and reduce refinance loan origination volumes.

Shares of this Zacks Rank #3 (Hold) company have lost 6.6% against a gain of 1.2% recorded by its industry over the past six months.

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