Fitch Ratings expects to rate Navient Corporation's (Navient) upcoming long-term $500 million senior unsecured notes issuance 'BB-(EXP)'.

Proceeds from the issuance are expected to be used for general corporate purposes, including the repayment of outstanding unsecured debt.

Key Rating Drivers

The unsecured debt is expected to rank pari passu with Navient's existing senior unsecured debt, and therefore, the expected rating is equalized with its outstanding senior unsecured debt and long-term Issuer Default Rating (IDR). The equalization reflects average recovery prospects under a stress scenario given the availability of unencumbered assets.

Fitch does not expect the debt issuance to have a meaningful impact on the company's leverage profile as proceeds are expected to refinance upcoming unsecured debt maturities. Navient's leverage, calculated as debt to tangible equity, excluding debt and capital associated with the guaranteed FFELP assets and the mark-to-market gains/losses on derivatives, was 11.2x at 1Q23, compared with 11.9x at YE22.

Navient's ratings reflect its scale and position as one of the largest non-government owners and servicers of student loan assets, its demonstrated track record (including as part of its predecessor organization) in the student loan servicing/collection space, the low credit risk and predictable cash flow nature of its FFELP loan assets and its adequate liquidity profile.

Rating constraints include Navient's monoline business model with a concentration on student lending, higher leverage relative to peers, a reliance on secured, wholesale funding and high levels of asset encumbrance, long-term strategic uncertainty related to the success of its growth initiatives, and ongoing regulatory, legislative and litigation risk related to student lending.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

An increase in Navient's debt to tangible equity ratio (excluding FFELP and the mark to market on floor income hedges) to over 12x on a sustained basis;

A decrease in the unsecured debt mix representing less than 10% of the company's non-FFELP funding;

Significant deterioration in credit performance of its private student loan portfolio leading to materially weaker operating results;

An increase in shareholder distributions above Navient's core earnings;

An adverse outcome in the pending CFPB actions that significantly impairs its market position, liquidity and/or future profitability.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Sustainable growth in core earnings from successful execution on new loan originations and business processing segment revenues;

Strong credit performance on the private education loan refi portfolio through periods of economic stress;

A meaningful reduction in leverage below 8.0x;

A demonstrated ability to access the unsecured debt market on economic terms.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The equalization of the unsecured debt rating with Navient's IDR reflects average recovery prospects under a stress scenario given the availability of unencumbered assets.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The expected unsecured debt rating is equalized with the long-term IDR and is expected to move in tandem. However, a meaningful increase in the proportion of secured funding or reduction of the unencumbered asset pool could result in the unsecured debt rating being notched down below the IDR.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

Date of Relevant Committee

23 February 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Navient has an ESG Relevance Score of '4' for Exposure to Social Impacts due to its exposure to shift in social or consumer preferences as a result of an institution's social positions, or social and/or political disapproval of core activities, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Navient has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy, and Data Security due to its exposure to compliance risks including fair lending practices, debt collection practices and consumer data protection, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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