DBRS: Nelnet’s Solid 2Q14 Results on Higher Revenues from Loan Acquisitions and Servicing Growth

Summary:
• For 2Q14, Nelnet reported net income attributable to the Company of $75.0 million compared to $101.2 million a year ago.
• On an underlying basis, results were solid, with increasing revenues reflecting both loan acquisitions and growth in fee-based businesses.
• DBRS rates Nelnet, Inc. Senior Unsecured Debt at BBB (low) with a Stable trend.

DBRS, Inc. (DBRS) views Nelnet, Inc.’s (Nelnet or the Company) underlying 2Q14 financial results as solid with good revenue growth and well-managed operating costs. Nelnet reported underlying net income of $70.2 million, up from $66.5 million a year ago excluding the gains from the repurchase of its own asset-backed debt, derivative market value and foreign currency adjustments. The results reflect the benefits of Nelnet’s continuing focus on building its fee-based businesses while acquiring federally guaranteed student loan portfolios in the market when opportunities are presented. To this end, in 2Q14 Nelnet acquired $4.8 billion of Federal Family Education Loan Program (FFELP) loans expanding the outstanding net portfolio to $29.5 billion.

DBRS-calculated adjusted revenues were 7% higher year-over-year (YoY) at $232 million, reflecting broad based revenue expansion. Net interest income totaled $107.7 million, a 6% YoY improvement due to an increase in the size of the FFELP loan portfolio partially offsetting a decrease in the core student loan spread. For 2Q14, the core student loan spread was 1.46%, a 6 basis point reduction YoY primarily reflecting the acquisition of FFELP Consolidation loans that have a lower yield but longer payment term. The growing servicing book for the Department of Education (ED) and higher revenue in Tuition Payment Processing segment underpinned the increase in adjusted non-interest revenue to $124 million compared to $116 million in the comparable period a year ago. Importantly, during the quarter the ED extended the servicing contract with Nelnet for an additional five years to June 2019.

Although higher from continued investments in the business, costs remain well controlled. Specifically, total operating expenses increased to $112.8 million from $102.9 million a year ago. The increase reflects higher headcount to support growing loan servicing volume and the acquisition of RenWeb partially offset by continuing expense reduction in the Enrollment Services segment. Nelnet announced that, due to continuing regulatory scrutiny of the for-profit college industry, which has resulted in reduced school spending on marketing efforts, the Company would be closing its inquiry generation services portion of the Enrollment Services segment. The impact of the closure of this business is expected to be immaterial and, as such, DBRS sees no impact to the rating.

During the quarter, Nelnet acquired RenWeb, a leading provider of school information systems, for total consideration of $46.3 million. DBRS views the acquisition as consistent with Nelnet’s strategic focus on growing fee-based, education-related products and services. Moreover, the acquisition is a complimentary fit with the Company’s current tuition management services and will enable Nelnet to offer a full suite of solutions deepening its value proposition to over 8,500 school customers.

Liquidity continues to be well-managed. During the quarter Nelnet increased the size of its unsecured line of credit to $350 million while extending the maturity to June 2019. As of June 30, 2014, $65 million was drawn on the facility. Available liquidity (unrestricted cash, investment securities, and availability under facilities) totaled $1.1 billion at quarter-end.

DBRS’s Senior Unsecured Debt rating for Nelnet, Inc. is BBB (low) with a Stable trend.

Note:
All figures are in U.S. dollars unless otherwise noted.