Nelnet's Rating Outlook Upgraded - Analyst Blog

The rating outlook of Nelnet Inc. (NNI) was upgraded to “Stable” from “Negative” by Standard & Poor's Ratings Services yesterday. The revision is based on Nelnet’s efforts to reduce its debt levels and growth in its fee-income businesses. The company’s investment-grade "BBB-" long-term counterparty credit rating was affirmed by the rating agency.

 

Nelnet’s fee-based revenue from its payment processing and enrollment services businesses in the second quarter of 2010 increased 19% year over year to $48.2 million. The company, which commenced servicing federally owned student loans for the Department of Education (DOE) in September 2009, has also experienced an increase in loans servicing and reported a growth in revenues from the servicing contract. Revenues from the servicing contract increased to $6.1 million compared with $3.5 million reported in the prior quarter.

 

However, recently Nelnet has agreed to pay $55 million as part of its efforts to settle a lawsuit that was filed by a former DOE researcher on behalf of the federal government. It was alleged that the company, along with some other organizations such as SLM Corporation (SLM), received improper subsidies from the government.  

 

Nelnet would pay this amount with its existing cash, which would impact the company’s third quarter 2010 results. Yet, this being a one-time event, it would not affect Nelnet’s ratings, according to the rating agency.

 

However, effective July 1, private lenders such as Nelnet and Sallie Mae are forbidden to originate new federal loans. This comes following the signing of the student loan reform act by the President in March.  

 

Nonetheless, Nelnet is experiencing an increase in profitability from its student lending business and is reaping the positives of the efforts to diversify in recent years. The company continues to shift to a fee-heavy business model and is currently servicing the DOE's Direct Lending Program. We believe this changeover from its traditional role of a lender will take some time.  

 

Nelnet currently carries a Zacks #1 Rank ('Strong Buy'), implying significant potential for upward pressure on the stocks over the next one to three months. The stock also has an Outperform recommendation from us in the long term.