Prospectus Summary
PROSPECTUS SUMMARY The following is a summary of material information discussed in this prospectus. This summary may not contain all the details concerning the separation or other information that may be important to you. To better understand the separation and Navient’s business and financial position, you should carefully review this entire prospectus.Explanatory Note
Due to the relative significance of Navient to Existing SLM, among other factors, for financial reporting purposes Navient will be treated as the “accounting spinnor” and therefore will be the “accounting successor” to Existing SLM, notwithstanding the legal form of the separation and distribution described in this prospectus. As a result, the historical financial statements of Existing SLM will become the historical financial statements of Navient.
When we refer in this prospectus to Navient’s historic business activities, we are referring to those activities as they were historically operated as part of Existing SLM prior to their transfer to Navient in connection with the separation and the distribution.
Navient
Navient will hold the largest portfolio of education loans insured or guaranteed under the Federal Family Education Loan Program, which we refer to as “FFELP Loans,” as well as the largest portfolio of private education loans, which we refer to as “Private Education Loans.” FFELP Loans are insured or guaranteed by state or not-for-profit agencies and are also protected by contractual rights to recovery from the United States pursuant to guaranty agreements among the U.S. Department of Education, which we refer to as “ED,” and these agencies. Private Education Loans are education loans to students or their families that are non-federal loans and not insured or guaranteed under FFELP. Private Education Loans bear the full credit risk of the customer and any cosigner and are made primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or students’ and families’ resources. As of December 31, 2013, approximately 85 percent of the FFELP Loans and 60 percent of the Private Education Loans held by Navient were funded to term with non-recourse, long-term securitization debt through the use of securitization trusts.
Navient will service and collect on its own portfolio of education loans, as well as on those owned by numerous banks, credit unions and non-profit education lenders. It will provide servicing support for guaranty agencies, which serve as intermediaries between the U.S. federal government and FFELP lenders and are responsible for paying claims on defaulted FFELP Loans. These services include account maintenance, default aversion, post default collections and claim processing. Navient will also be one of four large servicers to ED under its Direct Student Loan Program, which we refer to as “DSLP,” and will provide collection services to ED. Navient will also generate revenue through collection of delinquent debt (consisting of both education loans as well as other asset classes) on behalf of its clients on a contingent basis.
In 2010, Congress passed legislation ending the origination of education loans under the FFELP program. FFELP Loans that remain outstanding will amortize over approximately the next 20 years, and Navient’s goal is to maximize the cash flow generated by its FFELP Loan portfolio, including by acquiring additional FFELP Loans from third parties and expanding its related servicing business. For a detailed description of FFELP, see “Appendix B — Description of Federal Family Education Loan Program.”
As of December 31, 2013, on a pro forma basis, Navient’s principal assets consisted of:
In connection with the internal corporate reorganization described below, Existing SLM will become a subsidiary of Navient and retain all of its liabilities and obligations, including as obligor on its $18.3 billion of unsecured public debt outstanding as of December 31, 2013. Existing SLM also is party to derivative contracts on which it had a net liability of $794 million as of December 31, 2013.
SLM BankCo, as the publicly traded successor to Existing SLM and as part of the internal corporate reorganization, will replace Existing SLM as the issuer of the outstanding shares of Existing SLM preferred stock. Holders of shares of Existing SLM preferred stock will not be entitled to vote on the internal corporate reorganization, will not have appraisal rights under Delaware law, and will not participate in the distribution of Navient common stock.
In 2013, Navient’s business generated, on a pro forma basis, net income and “Core Earnings” of $1,369 million and $1,238 million, respectively. See “Unaudited Pro Forma Condensed Consolidated Financial Statements.” Navient provides “Core Earnings” because its management evaluates the performance of each of Navient’s operating segments based on “Core Earnings” performance measures. For Navient’s definition of “Core Earnings” and reconciliation of “Core Earnings” to net income as determined under generally accepted accounting principles, see “Unaudited Pro Forma Condensed Consolidated Financial Statements — Alternative performance measures — “Core Earnings” presentation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Core Earnings” — Definition and Limitations” and “Note 15 — Segment Reporting” to the audited consolidated financial statements included elsewhere in this prospectus.
Navient’s Strengths
Navient will possess a number of competitive advantages that will distinguish it from its competitors, including:
Premier servicing market share and infrastructure well-positioned for evolving marketplace. Navient will be the largest servicer of education loans. It will also provide account maintenance, default aversion, post default collections and claim processing to 15 of the 30 guaranty agencies that serve as an intermediary between the U.S. federal government and FFELP lenders, and are responsible for paying the claims made on defaulted loans. Navient’s premier market share and tested servicing and collections infrastructure make it well-positioned to expand its servicing and collections businesses to additional third-party FFELP, federal, private education and other loan portfolios.
Navient will have substantial institutional knowledge and expertise in student loan assets and finance markets. Sallie Mae was a pioneer in the student loan-backed securitization market and Navient will continue as the largest participant in this market. Navient will have established relationships with institutions that underwrite and invest in such securities and years of historical data to use in estimating loan default rates and expected cash flows.
Strong cash flow generation with ample debt service coverage. Navient will own the single largest portfolio of FFELP Loans. This portfolio generates steady cash flows, as FFELP lenders generally bear a maximum three percent loss exposure due to the guarantee under FFELP. Navient will also own the largest portfolio of Private Education Loans, which bear the full credit risk of the borrower and cosigner. Navient expects that cash flows from its FFELP Loan and Private Education Loan portfolios will significantly exceed future debt service obligations. Navient also expects it will be able to continue Existing SLM’s policy of returning capital to stockholders through dividends and share repurchases, subject to limitations under a tax sharing agreement with SLM BankCo. See “Capital Return Policies.”
Servicing platforms that offer substantial economies of scale. Existing SLM has internally developed and purchased technology platforms, which will be owned by Navient. Navient will service and collect on DSLP loans for ED, on FFELP Loans for guarantor and other clients and on its own $103.2 billion portfolio of FFELP Loans and $31.0 billion portfolio of Private Education Loans (on a pro forma basis, as of December 31, 2013). These platforms are robust and scalable and will enable Navient to add additional accounts at low cost.
Strong management team with extensive industry experience. Navient’s management team will have extensive experience in investing in and funding student education loan portfolios and operating student education loan servicing businesses. Our management team, led by our Chief Executive Officer Jack Remondi, includes members that have held senior executive positions at Existing SLM for many years, including in operations, financial planning, treasury, credit, collections, enterprise project management and risk management. See “Management — Executive Officers Following the Separation.”
Navient’s Strategies
Navient will seek to create value for stockholders by, among other things:
Expanding its leading education loan portfolio manager, servicer and collection business. Navient intends to make opportunistic acquisitions of FFELP Loans, both to increase cash flow from its loan portfolio and to expand its FFELP Loan servicing business. In addition, although Navient will not originate new Private Education Loans, it will seek to purchase portfolios of Private Education Loans, subject to the limitations of its non-competition arrangements with SLM BankCo. Navient may also acquire portfolios of Private Education Loans from SLM BankCo, through participation in an arm’s-length bidding or auction process.
Diversifying fee revenue through expansion and growth of federal and other service contracts. Navient intends to leverage its platform to expand its servicing and collections business to more third party owners of education loan portfolios and guarantors, including ED.
Maintaining stable dividends and actively managing capital structure. Navient expects to have sufficient liquidity to pursue a policy of returning capital to stockholders through dividends and share repurchases, without impairing its ability to service its $18.3 billion of unsecured public debt outstanding as of December 31, 2013.
Efficiently managing expense base. Navient will align its cost structure with its business operations, including by pursuing operating efficiencies in its businesses that create value for its stockholders. These initiatives will include exploring new procurement strategies as well as enhancements to its web-based customer service interface.
Maintaining access to capital markets. Upon completion of the separation, Navient will be a publicly traded company listed on NASDAQ. Navient expects that its significant loan portfolio, supplemented by its servicing business, will afford it the opportunity to access the debt markets when appropriate. Navient also intends to leverage its experience in the student loan-backed securitization market to continue to finance its acquisition of student loan portfolios through securitization debt.
Risks Associated with Navient’s Business and the Separation and Distribution
An investment in Navient common stock is subject to a number of risks, including risks relating to the separation and distribution. The following list of risk factors is not exhaustive. Please read the information in the section captioned “Risk Factors” for a more thorough description of these and other risks.
Risks Relating to Navient’s Business
Risks Relating to the Separation and Distribution
The Separation and Distribution
On May 29, 2013, Existing SLM first announced that it intended to separate into two distinct publicly traded entities — a loan management, servicing and asset recovery business and a consumer banking business. The loan management, servicing and asset recovery business will be comprised primarily of Existing SLM’s portfolios of education loans not currently held in Sallie Mae Bank, as well as servicing and collection activities on these loans and loans held by third parties. The consumer banking business, comprised primarily of Sallie Mae Bank and its Private Education Loan origination business, the Private Education Loans it holds and a related servicing business, will be a consumer banking franchise with expertise in helping families save, plan and pay for college.
On April 8, 2014, the Existing SLM board of directors approved the distribution of all of the issued and outstanding shares of Navient common stock on the basis of one share of Navient common stock for each share of Existing SLM common stock issued and outstanding as of the close of business on April 22, 2014, the record date for the distribution.
Internal Corporate Reorganization
In connection with and just prior to the separation and distribution, Existing SLM will undergo an internal corporate reorganization. This reorganization is necessary to implement the separation of the loan management, servicing and asset recovery business from the consumer banking business in a manner intended to be largely tax-free to SLM BankCo.
As part of the internal corporate reorganization, Existing SLM has formed the following three new companies:
Pursuant to Section 251(g) of the DGCL, by action of the Existing SLM board of directors and without the requirement for a stockholder vote, Existing SLM will merge with and into Merger Sub, which merger we refer to as the “SLM Merger.” As a result of the SLM Merger:
SLM BankCo will change its name to “SLM Corporation”. Following the SLM Merger, through a series of internal transactions, all of the assets and liabilities related to the consumer banking business of Existing SLM, including Sallie Mae Bank, the student education loans it holds, a new private education loan servicing company, the Upromise Rewards business and the insurance business, will be distributed by Existing SLM to SLM BankCo. Existing SLM will also distribute the capital stock of Navient to SLM BankCo. In addition, SLM BankCo will retain an additional $578 million in cash, on a pro forma basis as of December 31, 2013, primarily to offset the liability represented by the transfer of the preferred stock obligation from Existing SLM to SLM BankCo pursuant to the SLM Merger. Existing SLM, which will continue to hold substantially all of the assets and liabilities related to its loan management, servicing and asset recovery business, will then be contributed by SLM BankCo to Navient. Existing SLM’s liabilities included, as of December 31, 2013, its outstanding unsecured public debt of $18.3 billion and derivative contracts with a net liability of $794 million.
Once the internal corporate reorganization is completed, SLM BankCo (as the publicly traded successor holding company to Existing SLM) will distribute all of the issued and outstanding shares of Navient common stock, on the basis of one share of Navient common stock for each share of Existing SLM common stock issued and outstanding as of the close of business on April 22, 2014, the record date for the distribution. The completion of the internal corporate reorganization is a condition to the distribution. See “The Separation and Distribution — Conditions to the Distribution.” For additional information regarding the internal corporate reorganization, see the sections entitled “Transaction Structure” and “The Separation and Distribution — Internal Corporate Reorganization of Existing SLM Prior to the Distribution.”
Navient’s Post-Separation Relationship with SLM BankCo
Navient will enter into a separation and distribution agreement with Existing SLM and SLM BankCo, which we refer to as the “separation and distribution agreement.” In connection with the separation, Navient will enter into various other agreements with SLM BankCo to effect the separation and provide a framework for its relationship with SLM BankCo after the separation, such as a transition services agreement, a tax sharing agreement, an employee matters agreement, a loan servicing and administration agreement, a joint marketing agreement, a key systems agreement, a data sharing agreement and a sublease agreement. These agreements will provide for the allocation between Navient and SLM BankCo of Existing SLM’s assets, employees, liabilities and obligations (including its intellectual property, information systems, investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the separation and will govern the relationship between Navient and SLM BankCo after the separation. During an up to 24-month transition period, SLM BankCo will own a series of preferred stock of the primary operating subsidiary of Navient that will entitle SLM BankCo to nominate and elect one member of the subsidiary’s five-member board of directors which will have oversight authority regarding a variety of transition activities, including the transition and migration of certain customer data and service functions initially shared by the two companies. See “Certain Relationships and Related Party Transactions — Preferred Stock Rights in SMI.” Under the separation and distribution agreement, Navient and SLM BankCo will also enter into a non-competition arrangement pursuant to which they will agree not to compete in each other’s primary lines of business until December 31, 2018. For additional information regarding the separation and distribution agreement and the other transaction agreements, see the sections entitled “Risk Factors — Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.”
Reasons for the Separation
The Existing SLM board of directors believes that separating Sallie Mae into two companies — a loan management, servicing and asset recovery business and a consumer banking business — is in the best interests of Existing SLM and its stockholders for a number of reasons, including that:
Navient that will continue to be third-party vendors of services to, and “institution affiliated parties” of, Sallie Mae Bank will continue to be subject to the FDIC’s examination and enforcement authority. In addition, in order to facilitate compliance with certain consumer information privacy laws during an information technology transition period post-separation in which both Navient and SLM BankCo loans and associated customer accounts will continue to be serviced from a single information technology system hosted by Sallie Mae, Inc., or SMI, which will remain an affiliate of each of Navient and SLM BankCo for broader bank regulatory purposes for the duration of that transition period. Among other things, this will mean that transactions between SMI and Sallie Mae Bank will remain subject to the affiliate transaction restrictions of Sections 23A and 23B of the Federal Reserve Act during this transition period.
The Existing SLM board of directors also considered a number of potentially negative factors in evaluating the separation, including risks relating to the creation of a new publicly traded company, possible increased expenses and one-time separation costs and the diversion of management time to oversee the separation and transition of services and functions between the two companies, but concluded that the potential benefits of the separation outweighed these factors. For more information, see the sections entitled “The Separation and Distribution — Reasons for the Separation” and “Risk Factors” included elsewhere in this prospectus.
Corporate Information
Navient Corporation was incorporated in Delaware on November 7, 2013 for the purpose of holding the assets and liabilities of Existing SLM’s loan management, servicing and asset recovery business in connection with the separation and distribution described in this prospectus. Prior to the contribution of that business to Navient, which will be completed immediately prior to the distribution, Navient will have no operations. The address of Navient’s principal executive offices is 300 Continental Drive, Newark, Delaware 19713. Navient’s telephone number is (302) 283-8000.
Since February 25, 2014, Navient has maintained an Internet site at www.navient.com. Navient’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.