Price Target:$21.99/Share

Anais Addad

B.A.EconomicsMay 2017

Frank Zhang

B.A. EconomicsMay 2017

Jacqueline CheongB.A.

Applied Mathematics

May 2017

Jared AratB.A. Data

ModelingMay 2018

Market OverviewThe student loan markets is one of the largest and fastest growing debt markets in the world.

Roughly $1.32 Trillion in outstanding loansAs of 2012, 71% of all graduating students had student debt

2 Main VehiclesFederal loans offered by the Department of Education (fixed rate)

92.4% of the total market ($1.2203 Trillion)Loans offered by private lenders (usually variable rate)

7.6% of the total market ($99.7 Billion)Late stage delinquency rates are low at 4.8% and 2.2% respectively.

The new and unproven nature of these assets allows for dynamic future growth possibilities.

Changing Dynamics: Interest RatesHow will the student loan market react to borrowing rates departing from the current near-zero environment?

The majority of Federal loans before 2010 are variable rate and indexed to the 1-month LIBOR. We can expect net income over the amortization of these loans to scale with Federal interest rates. Fixed rate loans are recalculated yearly and based off the 10y Treasury Bill.

Almost all private loans are variable rate and are indexed either to the 1-month LIBOR or to the Prime Rate. We expect net incomes to scale accordingly.

Special asset recovery strategies written into the loans should mitigate any increase in default rates*. In addition, hedges against changes in the borrowing costs of the issuing party should minimize cost increases.

* See full report for details

Investment Thesis

We believe that in addition to the strong upward performance trends in key portfolio metrics such as loan delinquency and charge-off rates, the combination of the underlying value of the loan portfolio, the positive effects of future Federal interest rate increases, and industry leading value per share give this stock fantastic upside potential. For these reasons we initiate a BUY rating for Navient Corporation with a $21.99/share price target within 3-5 years.

Advantage Over CompetitorsPrivate student loan market

● Private student loans have a very low default rate of 2.74% and have robust underwriting standards.● In 2014, 95% of private student loans to undergraduates required the school to certify the student’s need for financing for further

security and verification. ● Despite the increased security of private student loans and higher default rate on federal loans, the private student loan

market consists of a very small percentage of the entire student loan market and does not pose as a threat in the near term.

NAVI has clear advantages over its competitors in the student loans marketMain competitors: Pennsylvania Higher Education Assistance Agency (PVT1), Nelnet, Inc. (NNI), and Brazos Higher Education

Service Corporation (PVT2), Inc. NAVI has a clear advantage in terms of size (market cap).NAVI remains the largest private holder of U.S. government-guaranteed FFELP loans.

Advantage Over CompetitorsMeaningful growth opportunity

● Revenue diversification expected as NAVI expands its Business Services segment to servicing and asset recovery.

Large, high quality asset base that helps generate steady cash flow● $96.5B portfolio of FFELP loans has a maximum loss exposure of 3%.● $122.9B education loan portfolio expected to produce consistent and predictable cash flows.

Efficient and large scale operating platforms● Largest servicer of education loans.● 12+ million customers. ● Inventory of over 1,000 public and private sector clients.

Superior default prevention performance and industry leading asset recovery services● Cohort default rate (CDR) of 8% (38% lower than peers).● Top performer in the asset recovery business.

Commitment to compliance and “customer first” attitude● Invested substantially in training programs, internal and external auditing, service tracking, and customer research. ● “Customer first” attitude and strength in compliance.

Strong capital return● Dividend increased from $0.15 to $0.16, showing significant cash flow and strong capital returns.

Management● Strong intention of completing the full $755M of repurchases in 2016.● Debt repurchase lifts funding and liquidity weigh on stock price and allows business to be more cost-effective.

Key DriversContinued improvements in loan portfolio metrics:

Expected continued decrease in total loan charge-off rates and loan delinquencies rates

Total private loan charge-offs have an average decline of 12% per year, using this average we can get forecasts for FY16-FY20

Total private loan delinquencies have an average decline of 11% per year, using this average, we get forecasts for years FY16-FY20

This demonstrates very consistent and strong repayment behavior

Key DriversNet Income is expected to increase within the next 3-5 years due to increased interest rates that will contribute to increase interest income

Navient’s net income has been decreasing at until 3Q15 (it was up 2.67% in 4Q15) mainly because of a decreasing Net Interest Income, which makes up about 50% of its income.

The low interest rates were putting pressure on Navient’s Return on Assets, that was below 1% over the course of the last 2 years. With interest rates projected to increase at a steady rate until 2020, we expect Navient’s ROA to increase benefiting from higher interest rates.

Key DriversConservative Funding Model: Navient’s value is today supported by its $123 billion student loan portfolio and it is expected to generate about $32 billion in cash flows.They have multiple sources of financing structures that enable them to finance their unsecure debt. Approximately, a third of the projected cash flows are expected to be generated and released over the next five years. To finance these assets, we've deployed for long periods of time here a very conservative funding plan. Our approach has been to utilize asset-backed pass-through structures.

● 90% of their debt is non-recourse

● 77% of the total debt is funded to the full term through Asset-Backed Securitization (ABS)

● We can expect that Navient will spread out or even but their debt maturities to match the cash flows ($32bn) that they expect to generate over the next 20+ years

Key DriversNavient has a history of evening our debt maturities and reducing unsecured debt

Since 2006, unsecured debt maturities were reduced by nearly $35bn from $48.7bn in 2006 to $14bn today through opportunistic debt repurchases. About $15bn of that reduction came in the form of debt repurchase

The $32bn of cash flow that Navient is expected to generate (before operating expenses) exceeds the $14bn of their current outstanding unsecured debt

Other alternative sources of financing:Securitization of unencumbered student loan portfolio (free of liability)

($4.3bn)Financing of existing overcollateralization ($11bn)

Based on our Discounted Cash Flow Analysis, we estimate a price target of $21.99 per share of NAVI.

This expectations do not take into account any potential bond downgrades, but even if that were to happen, our analysis would not change by much.

Financial ratios vs. industry averagePrice-to-Earnings on trailing twelve month basis is below Investment Services industry average. 4.24 compared with the

industry average of 17.19.

Price-to-Earnings Growth: Navient PEG ratio is at 1.61, higher than the Investment Services industry PEG average of -1.76.

Price-to-Sales ratio: The company's Price-to-Sales ratio is at 1.33, lower than the Investment Services industry's Price to Sales ratio is at 6.79.

Price-to-Book ratio: Navient Price-to-Book Ratio is at 0.85 lower than Industry Average of 1.27. and lower than S&P 500 Avg. of 13.14.

All of these suggests that the company is undervalued in relation to the industry (based on PE, PS and PB ratios), while

still having potential for growth, as demonstrated by the increasing PE ratio. The company’s attractive valuations makes it a

relatively good buy.

Risks1. The company is in danger of default due to inability to receive a new credit line

a. Some analysts and investors believe that because the line of credit was meant to finance the acquisition of old student loans from the FFELP program - a once-easy source of profit - is now harder to amass because Navient has less money readily available

2. Governments may increase oversights and implement stronger regulation of the student loan market.a. Navient may face difficulty in operations due to the increased oversight from government regulators. b. This problem is particularly acute recently, given the focus on the student loan market by the presidential

candidates. 3. The student loan market may be a bubble and there are risks of mass default.

a. Roughly 71% of students graduating from college had some form of student debt in 2012 b. Average loan amount per person was $29,000. c. The total amount of student loans outstanding exceeds $1.3 trillion dollars.

Mitigation of risk concerns1. The company was able to refinance their loans and will likely continue to receive new loans in the future

a. On March 14, 2016, Navient “announced that it has increased and extended its FFELP Asset-Backed Commercial Paper (ABCP) facility with seven global financial institutions. The facility’s revolving period was extended to March 8, 2018, and increased financing amount to $7.5 billion.

b. The company’s steady cash flows and good operating metrics will likely mean that it will continue receive new sources of financing, at least in the short term.

2. Upcoming election outcome will likely not impact the student loan industrya. In each election cycle, campaign promises are made regarding student loan reforms, but the industry rarely changes as a result. b. Navient (along with its predecessor, Sallie Mae) has tremendous lobbying power and have kept Congress from challenging the

company’s ability to operate. 3. Slowing repayment will not likely pose significant risks for the industry

a. According to a recent study by Moody’s, "The repayment rates on the FFELP term ABS trusts are slowing because a growing number of borrowers are opting for income-based repayment plans, and the number of loans in deferment and forbearance remains high.”

b. The risk of impairment to the residual investments in these securities because of the slowing payment rates is also limited.4. Regarding lack of closure regarding NAVI’s ABS legal final maturity issue

a. Rating agency concerns of ABS loan extensions should be resolved soon, b. NAVI has also amended six trusts to extend the maturity date, which helps to reduce concerns about the extension risk of the

education loans.

Additional factors1. Insider trades have been largely positive. Over the last 12 months, 1,019,787 shares have been bought by insiders, while only 130,319 shares have been sold, indicating that insiders have faith in the company’s future performance, and the insiders’ belief that the stocks are trading at a discount at the present.

2. Large institutional owners own the stock. Navient is largely institutionally owned, with the largest portion owned by the Vanguard Group at 10.64% of market share. The ownerships are fairly diversified and is held by respectable institutions.

RecommendationNAVI’s large market cap and dominance in the student loan market leads us to believe that they are a strong value stock with little risk from competition. Their high value loan portfolio puts the company in a unique position to benefit from changing market dynamics, and due to the current (and temporary) near zero interest rate environment, there has never been a better time to buy.With a target price of $21.99 per share, Navient is an attractive buy at the moment based on the low valuations despite its operating performance, and limited risk factors that can be mitigated. We believe that Navient is a strong buy.