JP Morgan’s USD 6.9bn student loan sale to NAVI faces only financial hurdles

08 June 2017

by Allison Pyburn

 

JPMorgan Chase does not need regulatory approval to transfer roughly USD 6.9bn in student loans to Navient Corp, despite assertions to the contrary, according to federal banking regulations and spokespeople for the bank and the Department of Education.

 

This means that any remaining hurdles to the sale — if any — are financial.

 

Chiefly, Navient has not disclosed its plans to finance the USD 3.2bn in private student loans subject to the sale. It had USD 1.36bn in cash on hand at 31 March and USD 209m in capacity in its USD 750m private student loan ABCP facility, which expires on 26 June. ABS swap margin posting requirements could affect Navient’s ability to securitize the loans, as reported (see article, 16 May 2016).

 

“Inevitably, we have the conduits available; we have our balance sheet capital available,” said Navient’s new Chief Financial Officer, Chris Lown, in response to a question about financing plans for the glut of loans on the company’s 1Q17 earnings conference call. “And if the unsecured markets are available at an attractive price, we could potentially tap those markets as well.”

 

At USD 2.7bn, a minority of loans to change hands in the sale are government-guaranteed FFELP loans and of those, USD 1.65bn are held in ABS.

 

Navient’s purchase of JPMorgan’s student loan portfolio is similar in several ways to its purchase of Wells Fargo’s USD 8.5bn FFELP portfolio announced in November 2014. In that situation, Wells arranged a USD 10bn ABCP conduit maturing November 2017. The conduit is supported by Wells, JPMorgan and Royal Bank of Canada. The same facility is likely to be used for the non-securitized FFELP loans Navient will acquire as part of the transaction.

 

The portfolio sale was minted on 18 April and initially envisioned to conclude by the end of  2Q17. The sale will transfer servicing from ACS to Navient.

 

Inconvenient truth

 

News of the JPMorgan sale ruffled the feathers of a number of consumer advocates who pointed to Navient’s recent run-ins with the CFPB and several state attorneys general as reasons why the sale should be blocked. Navient already contracts with ED as a direct loan servicer and acts as a third-party servicer for billions in FFELP loans. In order to block the sale, ED would essentially need to declare Navient an unfit servicer of FFELP loans — a move that would upset more than USD 120bn in FFELP servicing at a time when the legacy program faces an uncertain future.

 

“There is no specific approval required from the Education Department for the transfer of FFELP loans from one eligible lender to another,” according to a person briefed on the matter. “This would only become a problem if it were to become an antitrust issue.”

 

Navient is already in violation of a Higher Education Act clause which specifies that a third-party FFELP servicer must have a senior unsecured debt rating of AA-equivalent or higher, as previously reported. Navient’s senior unsecured debt rating is Ba3/BB- according to Moody’s and S&P. It is up to ED’s Secretary to decide whether to pursue that violation.

 

“We certainly seem to be moving to a point where all the loans are owned by Navient and guaranteed by Great Lakes [Higher Education Assistance Corp],” said one former ED official. “There has never been a plan to wind [FFELP] down so it’s been happening in a haphazard manner.”

 

Moreover, a nuance which has drawn little, if any, attention is that JPMorgan (and Wells Fargo) had outsourced its student loan servicing to Xerox-owned ACS, a servicer which ED fired years ago for bungling student loan accounts, according to public records.

 

The servicing errors were so egregious that in the case of four FFELP student loan deals JPMorgan Chase intends to transfer to Navient, the bank will “make no representations about and accept no responsibility for the accuracy or completeness” of account information provided by third-party servicer ACS. ACS entered into a remediation plan with ED and the CFPB in September 2015 and the servicer informed Chase that affected loans were remediated as of 30 November, according to remittance reports.

 

The ABS to change hands in the deal are: Collegiate Funding Services Education Loan Trust 2004-A; Collegiate Funding Services Education Loan Trust 2005-A; Collegiate Funding Services Education Loan Trust 2005-B; and Chase Education Loan Trust 2007-A. The deals had unpaid principal balances of USD 317.41m, USD 476.87m, USD 416.7m and USD 435.17m, respectively, as of 28 February, according to remittance reports.

 

Financing

 

If the initial purchase price paid for the USD 6.9bn portfolio is determined after 9 June, a change in market conditions clause could be enacted by either party, according to the sale agreement between JPMorgan and Navient.

 

The SEC approved Navient’s request to conceal the price it plans to pay JPMorgan for the student loan portfolio, according to SEC filings. However, JPMorgan listed its student loan portfolio balance at USD 6.916bn at the end of the 1Q17. It increased its provision for credit losses by USD 380m to USD 1.4bn in the first quarter, driven in part by the transfer of the student loan portfolio held for sale. The bank’s loans held for sale portfolio increased to USD 6.47bn at quarter-end from USD 3.78bn at the end of 2016. Navient purchased the portfolio at a discount, according to executive remarks on the company’s 1Q17 earnings conference call.

 

“Depending upon market conditions and other available funding at the time of each portfolio purchase, we expect a portion of the JPMorgan Chase portfolio acquisition to be funded through our existing ABCP facilities,” Navient wrote in its first quarter 10-Q. At 31 March, it had USD 3.1bn in capacity available in its facilities used to finance FFELP loans but only USD 209m available in its USD 750m private student loan ABCP facility. Its private student loan ABCP facility matures on 26 June, according to the 10-Q.

 

Navient held USD 2.7bn in unencumbered private student loans and USD 600m in unencumbered FFELP loans at 31 March, according to its 10-Q.

 

Navient used private student loan residuals as collateral for two repurchase facilities created in 4Q15 and 2Q16, which total USD 550m and USD 478m, respectively. The facilities carried a cost of funds “lower than that of a new unsecured debt issuance” at the time, according to the 10-Q.