Press Release

DBRS Morningstar Confirms the Ratings of Nelnet, Inc. at BBB (low); Trend Stable

Non-Bank Financial Institutions
July 14, 2023

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Nelnet, Inc. (Nelnet or the Company), including its Long-Term Issuer Rating and Long-Term Senior Debt, both at BBB (low). Nelnet’s Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3 resulting in the final rating being positioned in line with the IA. The trend on all ratings is Stable.

The ratings consider the Company’s sound franchise in education-related business services, good and increasingly diversified earnings generation capacity, low credit risk profile, proper liquidity management and sound capitalization. The ratings also consider the Company’s restrained earnings growth trajectory due to the Federal Family Education Loan Program (FFELP) portfolio’s ongoing runoff. That said, the June 2023 ruling by the U.S. Supreme Court that blocked the student loan forgiveness initiative by the U.S. government essentially eliminates the risk of a significant paydown of Nelnet’s FFELP portfolio that would have adversely impacted its earnings generation capacity over the medium-term. This risk was also significantly reduced when the U.S. Department of Education (ED) revised its guidance in September 2022 where non-ED held FFELP loans were no longer eligible for the proposed debt relief program by consolidating them into the government’s Direct Loan Program.

Additionally, in April 2023, the Company received a new servicing contract award from the ED, the Unified Servicing and Data Solution (USDS), reinforcing the Company’s franchise and earnings power. The USDS will replace the existing legacy ED student loan servicing contract that was scheduled to expire in December 2023. The new contract has a five-year base period, with possible extensions up to ten years.

In our view, both of the aforementioned recent developments position the Company well by removing uncertainty and providing better visibility on the Company’s prospects over the coming years, all of which are supportive of the ratings.

The Stable trend reflects our expectation that the Company will continue to generate solid earnings while maintaining appropriate capitalization and effectively managing its liquidity and funding sources. Nevertheless, a contraction in the U.S. economy as a result of the Fed’s tightening measures coupled with a material deterioration in the labor markets constitute key downside risks to our expectations.

If the Company continues to generate sound financial results through a potentially challenging economic environment, the ratings would be upgraded. In addition, further revenue diversification combined with franchise expansion through Nelnet Bank, while maintaining a similar risk profile, would also result in a ratings upgrade. Conversely, a sustained weakening of the Company’s earnings generation ability accompanied by a material deterioration of its capital position or risk profile would result in a downgrade of the ratings.

Nelnet has a sound franchise underpinned by its leading position in the education services marketplace. As the largest servicer for the ED while also providing servicing for private education and consumer loans for 35 third-party customers and offering backup servicing arrangements for 20 additional entities, the Company has substantial scale in student loan servicing. Additionally, Nelnet is the market leader in providing education support solutions and tuition payment management to nearly one-third of all private and faith-based K-12 schools in the U.S. In the higher education market, it provides services to approximately one-fifth of U.S. colleges and universities. Nelnet Bank’s (the Bank’s) deposit platform, private loan products and the introduction other consumer loans in 1Q23 reinforce the Company’s franchise. The Company’s franchise is also supplemented by its investments in communications and renewable energy investments.

The Company has historically demonstrated good earnings generation capacity while it has been gradually diversifying its revenue streams to partially offset the continued decline in revenue associated with the ongoing runoff of is sizeable FFELP portfolio. Nelnet’s growing fee-based businesses are supplemented by the expansion of its loan book through the Bank. Fee-based revenue accounted for approximately 71% of total net revenue in 2022, up from nearly 50% just six years ago. In 2022, Nelnet generated $231.3 million of core net income (excl. derivative market value adj.), compared to $322.7 in 2021 mainly driven by higher loan loss provision (vs. negative provision in 2021) and higher operating expenses in anticipation of the federal student loan payments resumption that collectively more than offset the increase of fee-based revenues. On as reported basis, net income of $407.3 million in 2022 was slightly higher from the prior year. For 1Q23, core net income was $54.9 million, down from $75.9 million in 1Q22 mostly due to the higher provisions (vs. slightly negative provisions in 1Q22). The modestly adverse impact on revenue due the termination of its portfolio of derivatives used to hedge loans earning fixed rate floor income should be offset from the rising rate environment while reducing volatility on reported earnings.

We view Nelnet’s overall low risk profile as being supportive of the ratings. The Company’s credit risk exposure is limited given that 93% of its $13.9 billion loan portfolio (incl. the Bank’s) at March 31, 2023 is comprised of FFELP student loans, which are federally guaranteed to at least 97% of principal and accrued interest at default. As the FFELP portfolio runs off and its organic private education and consumer loan portfolio grows, the Company’s credit risk exposure should incrementally increase over time. At just 3% of total loans, the private education loan portfolio is originated through the Bank and is comprised of high quality borrowers (approx. 86% of balances were associated with FICO at origination of 735+). Meanwhile, non-Bank private education loans have good credit metrics with 30+ day delinquency rate of 2.5% as a percent of loans in repayment at March 31, 2023 and a net charge-off rate of 0.78% in 1Q23. Additionally, Nelnet can be highly selective and swiftly adjust its non-Bank private education and consumer loan purchases. Of note, Nelnet’s FFELP portfolio is not subject to the student loan payment moratorium of government held (direct) loans set to expire in September while its delinquency and forbearance rates have been consistent with pre-pandemic trends. The indirect impact to Nelnet’s FFELP portfolio credit performance with the resumption of the direct loan payments is likely to be limited since most of the previously eligible borrowers for the student loan debt relief program, holding both direct and Nelnet-held FFELP loan, would have already consolidated them into the government’s Direct Loan Program.

The Company’s funding profile is mostly reliant on secured forms of funding, but is well-suited for its asset base composition. Nelnet has demonstrated a flexible and measured approach to utilizing its funding sources to support its operations, including portfolio purchases or bolt-on acquisitions. As of March 31, 2023, Nelnet had $13.4 billion of total debt outstanding, of which approximately 87% was term asset-backed debt mostly comprised of federally insured student loans. The term financing through asset back securitizations limits the Company’s refinancing risk while supports its liquidity through the associated substantial undiscounted future residual cash flows totaling $1.43 billion. The Bank’s growing deposit base should further diversify the Company’s funding composition over time. As of March 31, 2023, Nelnet's has ample available liquidity of nearly $1.9 billion (including the Bank), comprised of cash ($187.6 million), available for sale asset-backed securities ($471.1 million, excl. ABS restricted or associated with repos and participation agreement), unencumbered loans ($285.4 million), unused borrowing capacity in warehouse facilities ($498.3 million) and from its unsecured line of credit ($495.0 million).

Nelnet’s capitalization is sound for its lower risk business model that includes capital-light fee-based business segments. The Company’s capital levels provide ample cushion to absorb losses under stressed conditions. Additionally, Nelnet’s consistent capital generation capacity and prudent capital management support its capital position. The capital payout (including dividends and share repurchases) was 34% in 2022 and 49% in 1Q23, consistent with the Company’s historically healthy internal capital generation retention. Capitalization metrics further strengthened over the past year as the tangible common equity-to-tangible assets (TCE) ratio increased to 16.7% at March 31, 2022, from 13.9% at the year ago period due to higher equity levels and a decline in total assets.

General Considerations
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (July 4, 2023).

All figures are in in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions: (September 2, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at:

The primary sources of information used for this credit rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

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