DBRS: Nelnet’s 2Q Results Stable QoQ on Portfolio Growth; Segment Performance Mixed

Summary:
• For 2Q15, Nelnet reported underlying net income of $63.5 million, broadly stable quarter-on-quarter (QoQ), as higher net interest income offset marginally lower fee and other income.
• By segment, performance was mixed impacted by growth in the loan portfolio, an expanding servicing portfolio, further execution on the business strategy, as well as federal legislative changes to the student loan program.
• 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 2Q15 financial results as solid given the shifting higher education services market and the low rate environment. For 2Q15, Nelnet generated underlying net income, of $63.5 million, broadly stable from the prior quarter, excluding the impact of derivative market value and foreign currency adjustments.

By segment, results were mixed with the Company’s largest segment, Asset Generation and Management (AGM) reporting an 11% increase QoQ in earnings to $55.3 million. Strong acquisition activity of both FFELP student loans and private education loans combined with a stable core student loan spread of 1.41% drove net interest income higher. DBRS notes that the core student loan spread continues to benefit from the low rate environment and the resulting fixed rate floor income generated in such an environment by the FFELP portfolio.

Student Loan Servicing and Guaranty segment results were higher QoQ underpinned by the expanding portfolio of loans serviced for the Department of Education (ED). DBRS notes that guaranty servicing income was lower reflecting the ongoing headwind from federal legislative changes to the fees paid for collection services. Of note, Nelnet disclosed that its largest guaranty servicing client, which accounts for most of the Company’s guaranty servicing revenue, notified the Company that it would not renew its contract that expires at the end of October 2015. While a negative for the Company, DBRS sees the impact as manageable from an earnings perspective, as the relationship accounted for just 5% of 2014 revenues and there will be some offsetting costs removed from Nelnet’s expense base with the relationship expiring.

Positively, Nelnet continues to execute on its strategic initiatives including broadening its suite of products to colleges and other educational institutions. For 2Q15, the Company’s Tuition Payment Processing and Campus Commerce (TPP & CC) segment generated solid results with revenues lower QoQ largely reflecting seasonality, but higher year-on-year reflecting growth in the customer base, as well as the acquisition of RenWeb in 2Q14. Meanwhile, results in Corporate and Other were lower QoQ as the improving capital markets reduced opportunities for the Company’s investment advisory subsidiary to generate fees.

From DBRS’s perspective, Nelnet continues to hold sufficient liquidity to capitalize on market opportunities to acquire existing student loan portfolios when available. At June 30, 2015, Nelnet had available liquidity (unrestricted cash, available-for-sale and trading securities and available capacity under bank warehouse facilities) of $1.1 billion.

DBRS rates Nelnet, Inc. Senior Unsecured Debt rating at BBB (low) with a Stable trend.

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