Risk is Higher for Navient than Nelnet following FFELP Loans Reports - Credit Suisse

© Reuters. Risk is Higher for Navient than Nelnet following FFELP Loans Reports - Credit Suisse

By Sam Boughedda

A Credit Suisse analyst said in a research note to clients on Monday that Navient (NASDAQ:NAVI) and Nelnet (NYSE:NNI) will be impacted by reports over the weekend that FFELP loans are likely to be eligible for forgiveness/consolidation.

Credit Suisse wrote last week about the administration's plan to forgive student debt, although they said at the time, it was not clear whether the privately held FFELP loans (owned by NAVI and NNI) would be eligible for the forgiveness program. However, a series over the weekend by the NY Times indicated that privately held FFELP loans would be eligible for consolidation if they were disbursed before June 30.

The analyst stated that "if this is correct, it is likely that the loans held by NAVI and NNI would be subject to the forgiveness program, and could even be more extreme, if borrowers consolidate to take advantage of forgiveness – because then the companies would lose the entire balance, not just the $10,000 amount forgiven."

"We don't have enough information from publicly available sources to get an accurate estimate of what the consolidation/forgiveness program could cost. However, Nelnet had shown some sensitivities in its 2022 10-Q filings," the analyst added.

The analyst believes that given that the company would collect ~$230mm more over the next 18 months in the highest prepay scenario, it is likely that cash (plus the capital backing the loans) could be used to repurchase enough stock to offset the loss in value.

"We would assume that Navient would have a similar impact. (Navient added a general comment about risks of higher levels of prepayments in its second quarter 10-Q but did not provide any quantification of the risks.) While this is not a precise representation, we note that FFELP net interest income represents ~37% of Navient's revenue in Q2, compared to ~23% for Nelnet. As such we would conclude (with the limited disclosure provided) that the risk is higher at NAVI than at NNI," he concluded.

Nelnet shares are down 1.5% Monday, while Navient tumbled over 8%.