Navient's (NAVI) CEO Jack Remondi on Q4 2015 Results - Earnings Call Transcript

| About: Navient Corp (NAVI)

Navient Corp (NASDAQ:NAVI)

Q4 2015 Earnings Conference Call

January 27, 2016 8:00 a.m. ET

Executives

Joe Fisher - VP, Investor Relations

Jack Remondi - CEO

Somsak Chivavibul - CFO

Analysts

Moshe Orenbuch - Credit Suisse

Mark DeVries - Barclays

Lee Cooperman - Omega Advisors

Sanjay Sakhrani - KBW

Eric Beardsley - Goldman Sachs

Mark Hammond - Bank of America

Richard Shane - JPMorgan

Operator

Good morning. My name is Shannon and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Navient Fourth Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

It is now my pleasure to turn today’s call over to Mr. Joe Fisher, Vice President, Investor Relations. Mr. Fisher, you may begin your conference.

Joe Fisher

Thank you, Shannon. Good morning and welcome to Navient’s 2015 fourth quarter earnings call. With me today are Jack Remondi, our CEO; and Somsak Chivavibul, our CFO. After their prepared remarks, we will open up the call for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors in the company’s Form 10-K and other filings with the SEC.

During this conference call, we will refer to non-GAAP measures, we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures, and our GAAP results can be found in the fourth quarter 2015 supplemental earnings disclosure. This is posted, along with our earnings press release on the Investors page at navient.com. Thank you.

And now I’ll turn the call over to Jack.

Jack Remondi

Thank you, Joe. Good morning everyone and thank you for joining us today. Today’s call is particularly important. The financial markets have created pressure on both our debt and equity erasing significant value from investors. This morning I’ll address the factors impacting our enterprise value, what we're doing to manage them and demonstrate why the intrinsic value of our company remains strong and intact. Front and center for us and I know many of you, is our access to and cost of liquidity.

The legal final maturity date topic has caused spreads to widen and trading to be limited in the FFELP ABS market. This, along with the disruptive high-yield market, has caused our unsecured debt spreads to widen. Some investors have asked about our ability to continue to return excess capital to shareholders while meeting our unsecured debt maturities. Let me be perfectly clear: I am confident we can continue to do both. In fact, we have a plan to do so.

I am confident because our $123 billion portfolio of student loans generate sizable and predictable cash flow. This cash flow totaled $3 billion in 2015 and is projected to be $2.7 billion in 2016. In addition, we have a very long track record of securing funding from the assets we own. For example, in the fourth quarter we completed two new first-time financings for over $900 million at a cost that was several hundred basis points inside of our unsecured debt spreads. We used the proceeds to take advantage of market conditions and we repurchased $691 million of unsecured debt generating a gain of $21 million.

We also confirmed our confidence in our cash flows with the new $700 million share repurchase program. And we used our authority, in 2015 we repurchased 56 million shares and since January 1, we've acquired an additional 5.4 million shares. Combined, over 15% of shares outstanding at the beginning of 2015.

In 2015, we took a number of steps to address the legal final maturity topic. During the year we amended six trusts to extend the maturity date, amended 16 different trusts to provide us with an additional 10% loan purchase option, and we exercised cleanup calls on 12 ABS trusts totaling $1.1 billion. Notably, these actions consumed little additional liquidity, nor did they increase our costs.

We also provided extensive data to the rating agencies and investors to demonstrate the stability of federal student loan cash flows, even under the unlikely deferred payments trust scenarios. While the rating agencies have yet to issue their final AAA criteria for FFELP ABS, we are confident they will be less stringent than their preliminary statements.

We also maintain significant liquidity for loan purchases. This liquidity is most often in the form of limited purchase -- limited purpose structured debt facilities. We’ve used these facilities consistently for close to 20 years to support our loan acquisition activities, including the acquisition of loans from cleanup calls associated with our ABS trust. These facilities provided the liquidity to purchase $3.7 billion in student loans and $1.1 billion in cleanup call acquisitions in 2015.

The prepayment and default assumptions that drive our projected cash flows are based on our over 40 years of data and experience. Each year the cash flows realized have closely matched our projections and we’ve been able to add to the expected future cash flows with servicing skills that reduce default rates, by capturing floor income, and by purchasing student loan portfolios at appropriate prices.

This is not our first experience with difficult markets. Our long track record here demonstrates our deep understanding of our assets and our ability to confidently and creatively manage our liquidity and maximize our cash flows.

Headlines covering student loans have created storylines that lead one to believe that most student loan borrowers have an overwhelming debt burden that cannot be met. That's far from the typical experience. For example, 85% of our federal loan customers are current. Still some student loan borrowers do have more debt than they can reasonably afford. This is usually due to dropping out before they earn their degree, taking six years or more to complete their degree, or paying more than the degree is worth.

At Navient, our practices are designed to assist struggling borrowers with solutions that keep them out of delinquency and default and instead drive repayment success. For short-term issues, payment deferral may be a good solution while income-based solutions address longer-term challenges. Paying down the loan balance is, however, the true objective. That's why we continue to recommend that federal policy should include programs to provide students with actionable information about the financial resources they will need to earn their degree on time and whether or not their degree supports that investment.

Many are surprised to learn that the average bachelor's degree recipient who borrows for a four-year degree and not all do, leave school with less than $29,000 in loans. Furthermore, while a small percentage of undergraduate borrowers owe more than $60,000, defaults are far more likely to occur among those who borrow substantially lower amounts.

In addition, many are not aware that program-wide default rates and delinquency rates have fallen significantly since the end of the Great Recession. In fact, at year-end our total delinquency rates for both our federal and private portfolios are at the lowest levels in over a decade.

Finally, student loans are on the agenda of several regulatory agencies. While we continue to be responsive to the request from regulators, we also work to demonstrate the effectiveness of our servicing practices and data-driven servicing solutions that we use customer feedback to drive changes and how we lead efforts around industry best practices. It's important to acknowledge here that for federal student loans, neither FFELP lenders nor Department of Education loan servicers set the price, school charges, the amount a student can borrow, the interest rate on the loan, the repayment terms, nor a borrower's eligibility for any of the over 40 alternative repayment and deferment options available to them. And we like all federal loan servicers must follow rules and regulations issued by the Department of Education.

Over the years, the federal student loan program has added numerous loan programs and repayment options. These programs often have very similar sounding names, like income sensitive, income-based, pay as you earn and revised pay as you earn. We assist our customers in understanding the different options so they can select the payment program that best fits their needs. Still, the numerous options, unique terms, lengthy applications can all be overwhelming to borrowers. We continue to advocate for program simplicity as a way to meaningfully increase customer participation. Policies and programs should encourage borrowers to contact their servicers, not overwhelm them. Contact works and it should be encouraged.

The regulatory focus on student loans has led some to believe that new regulations could significantly increase our cost to service our loans. We have a decade’s long track record of managing regulatory changes while simultaneously improving our operating efficiency. We’re able to do this as a result of our expertise and scale and expect to be able to do so going forward. For example, this year we automated our processes for SCRA benefits and enrollment and re-enrollment in income driven repayment programs, including the new revised pay as you earn program. Both of these examples would otherwise be very labor-intensive tasks.

During 2015, our great team maintained our focus on our business and building value. I am proud of our work and thankful for their commitment. For the year we generated core cash earnings of $1.85, reduced outstanding unsecured debt by $2.3 billion. We returned $1.2 billion to shareholders through dividends and share repurchases, reduced private credit charge-offs by $58 million or 8% ending the year at the lowest delinquency rates since 2005. Expanded our business services with the acquisition of Gila and Xtend. We converted nearly $5 billion in FFELP loans to our servicing platform. We enrolled or reenrolled over million borrowers into income driven repayment programs, assisted 728,000 severely delinquent customers who are now current, and finding a solution that help them avoid default, and we improved our operating cost and efficiency.

For 2016, we’re focused on realizing the value of our portfolio and leveraging our core skills to generate growing earnings from our student loan and non-student loan businesses. The current financial market conditions, however, will likely limit opportunities to purchase student loan portfolios in the near term.

While our net financing plans are modest in 2015, we do plan to issue FFELP and private asset-backed securities shortly and unsecured notes later this year. While Somsak will provide more details later in the presentation, we believe our business will generate core EPS between $1.82 and $1.87 per share in 2016.

Yesterday, our stock closed at $9.45 a share. I do not believe this is an accurate reflection of our value. It’s not even close. In today's earnings presentation, we provide a summary of our expected future cash flows from our existing student loan portfolios. These cash flows are expected to exceed $31 billion before unsecured debt and operating expenses. The $31.7 billion in cash flow is also not discounted.

Several research analysts have estimated the net present value of these cash flows, including unsecured debt and including operating expense. They produce per-share estimates in the high teens and low 20s. I agree with these estimates and strongly agree with them. Our focus for 2016 is to realize this value. We will do so by focusing on maximizing our earnings and cash flow and by using excess capital to repurchase our shares -- shares that are trading at a very deep discount.

We intend to utilize the full $755 million available at January 1 under our share repurchase authority this year. At today's prices, this would equate to buying over 20% of shares outstanding.

Thank you for your interest and support. We’re committed to on delivering our enterprise value to our investors and I'll now turn the call over to Somsak for more a detailed review of the financials.

Somsak Chivavibul

Thanks, Jack. Good morning everyone. During my prepared remarks, I will be addressing the fourth quarter results, highlighting the recent financing activity and I’ll provide additional detail behind the company's 2016 earnings guidance. I will be referencing the earnings call presentation which is available on the company's website and let me start with Slide 4 which provides a summary of our core earnings.

In the fourth quarter, we reported adjusted core earnings per share of $0.49. These results exclude $0.01 per share or $7 million of regulatory related costs during the quarter. Our full year 2015 core EPS was $1.85, excluding regulatory related costs.

In our fourth quarter, adjusted operating expenses totaled $228 million versus $206 million a year ago. This increase is related to the additional cost resulting from the acquisition of Gila and Xtend Healthcare. And as Jack mentioned, we expect our full year 2016 core EPS to range between $1.82 and $1.87 and we expect our operating expenses to be under $930 million for 2016. Both these items exclude the impact of any regulatory related costs.

The primary driver for the increase in operating expenses from 2015 will be the full year run rate for Xtend and Gila. Excluding the operating expenses from the two companies, our 2016 projected core operating expenses will be 6% lower than 2015 levels.

Let’s turn to Slide 5 to discuss our FFELP segment results. FFELP core earnings were $74 million for the fourth quarter of 2015 compared with $85 million in the fourth quarter of 2014. In the quarter, our FFELP NIM was at 84 basis points, and we expect the full year 2016 FFELP NIM to remain in the low to mid 80s. Our FFELP NIM may be impacted by future LIBOR rates which will determine the amount of floor income in our portfolio. But since quarter end – since the quarter ended, we’ve hedged an additional $217 million of floor income, bringing the future hedged floor income total to over $1 billion.

Let’s turn to Slide 6 to review our private education loan segment results. Core earnings in this segment decreased $36 million from the year ago quarter to $56 million. During the quarter Navient sold a $178 million of low coupon private education loans which raised $157 million. The reduction in interest expense from paying down the debt and servicing fee income we retained had a net present value greater than the loss in the future expected spread income from this portfolio.

Our third-quarter net interest margin came in at 3.61%. The private net interest margin continues to be impacted by the timing of when our prime based earning assets reset versus our debt that is funded with LIBOR. As a result, we are forecasting the full-year 2016 private student loan net interest margin to be in the mid-350s. At year end we have approximately $17 billion of prime earning assets funded by liabilities indexed at LIBOR.

Slide 7 highlights our improving private education loan asset quality trends over the last five years. This is a portfolio that is well seasoned, with 94% of our loans in repayment status having made more than 12 payments. Our fourth quarter charge-offs came in at 2.3% or $33 million lower than the fourth quarter of last year.

Our total delinquency rate of 7.2% at year-end is at the lowest rate that we’ve seen since 2005. And for 2016 we expect our annualized charge-off rate for the full year to be between 2.3 and 2.5%.

Let’s turn to Slide 8 to review our business services segment results. In this segment, core earnings were $81 million in the quarter compared with $95 million in the fourth quarter of 2014. The decrease was related to an expected $8 million reduction in asset recovery revenues related to a legislative reduction that we highlighted in the third quarter along with the decrease in education loan related expenses – revenues.

Our non-federal student loan related asset recovery revenues increased by $70 million for 2014 to $118 million for 2015. The increase in these revenues was primarily related to the additions of Gila and Xtend Healthcare in 2015. And we expect our full year 2016 business services revenues to range between $620 million and $650 million and that revenue excludes any intercompany loan servicing revenues.

I would like to highlight the financing activities that took place in the fourth quarter on Slide 9. During the quarter, we issued a $359 million private loan ABS and this transaction was unique since it was a first of its kind from Navient with collateral consisting entirely of seasoned performing non-traditional loans. While the term non-traditional may have negative connotations, the assets in this deal improved from the average FICO score of 625 at origination to a current score of 690. This demonstrates the positive impact the seasoning had on the credit quality of this portfolio.

Of the $2.1 billion of non-traditional loans in repayment or forbearance on our balance sheet, nearly 90% of these loans have made more than 12 payments. We also raised an additional $500 million in the quarter through a new two-year private education loan repurchase facility. This is the first time we have structured the facility to allow us to advance against the over-collateralization associated with our private education loan securitizations that have a turbo repayment structure. After this transaction, we have similar securitizations with $3.1 billion remaining at current OC levels, and that's expected to grow to $4.5 billion at expected maturities.

During the quarter, our unsecured debt declined by $734 million to $15.2 billion outstanding at year end. Of the $734 million reduction in unsecured debt, $691 million was achieved through repurchases, through tender offers and open market transactions. And during the quarter we repurchased 14.1 million shares or $170 million and announced an additional $700 million share repurchase authorization.

Since January 1, we’ve spent $55 million and as of today we have remaining authority of $700 million under our current share repurchase plan. All of this activity was undertaken while maintaining a strong capital position and resulted in a tangible net asset ratio of 1.25 times. We continue to reduce and smooth out our debt maturity profile to better match the cash flow generated by our asset management business.

Finally, turning to GAAP results on Slide 10. We recorded fourth quarter GAAP net income of $286 million or $0.79 per share as compared to net income of $263 million or $0.64 per share in the fourth quarter of 2014. The primary differences between core earnings and GAAP results are the marks related to our dilutive position, expenses related to the restructuring and reorganization and the income associated with SLM Bank.

I will now – let’s open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Moshe Orenbuch from Credit Suisse.

Moshe Orenbuch

Great, thanks so much, and nice work on the debt side, and comments on the equity side also. Jack, I was wondering if you can kind of elaborate a little bit, given the tools that you have, like how do you see the progression over the next few months or quarters with respect to dealing with the outstanding unsecureds?

Jack Remondi

So I think we made – to your point, we made great progress at the end of 2015, reducing 2016 debt maturities and our focus really now is on continuing to access the capital markets to knock down our maturities in 2018 and ’19. So that’s really where the focus is. When we look at our liquidity balances, both cash on hand and assets that we believe are financeable, we feel we’re in a pretty good position here to be able to access the liquidity we need to address our unsecured debt maturity, the higher balances in ‘18 and ’19.

Moshe Orenbuch

Kind of separate question, you did buy some FFELP assets this quarter. Could you just talk a little bit about what is going on there and you did mention that you expect to be able to do FFELP securitizations, so can you talk about what you're seeing is the likely terms on that?

Jack Remondi

Yes, so we do buy FFELP. We continue to buy FFELP assets where prices make sense. A lot of that activity is associated with rehabilitation loans and the economics of those transactions even at current funding levels generate a good economic returns for us and we will continue to see more of that we believe in 2016.

On the FFELP side of the equation, as I said, I think we are of the view that the criteria for the stress test scenarios will come inside of where the rating agencies have discussed to date, which means that we believe we can get deals rated and plan to test that market in the near term for a FFELP transaction, there will be some unique characteristics to this that – well, I can’t probably talk about at the moment but we think it will be something that can get done and get done at levels that make sense.

Moshe Orenbuch

Just to follow up on that, I understand you can’t talk about what the characteristics are, but what’s the outcome? In other words, to the extent that you can do that, does that mean it would become more efficient to buy portfolios?

Jack Remondi

So, on that particular point, we are always willing to buy portfolios. The question is more is there --is the seller willing to sell at the prices that make sense given the cost of funds? So we have more than ample liquidity to buy FFELP loans primarily through our conduit facilities. We ended the year with about 3.6 billion of liquidity in that size -- in those areas. The issue is more particularly for banks who own these portfolios, these loans are government guaranteed, there’s not a credit risk, they’re funding them with deposits. They’re not willing to sell at a loss.

Operator

Your next question comes from the line of Mark DeVries of Barclays.

Mark DeVries

Yes thanks. I was hoping you could elaborate a little bit more on why you expect the private student loan margin to be 3.5% which is down I guess from the 3.8% you expected going into 2015, and the 3.65% you guided to for this quarter. Are you expecting that, that whole timing mismatch issue to persist for the full year?

Somsak Chivavibul

Yes. Mark, this is Somsak here. Certainly, what you saw was an increase in the prime rate that occurred late in 2015. I expect that, that timing issue will, from a seasonal perspective, benefit the first quarter private spread. But to the extent there is an increase in LIBOR rates for after the first quarter 2016, without a corresponding increase in the prime rate, you might see some of that timing mismatch for the remainder of 2016. So that’s what we’re reflecting in the guidance there.

Mark DeVries

And then Jack, given the anxiety that’s clearly reflected in both the equity and the debt markets, did it make sense at all to think about suspending the dividends, so you can use that cash flow to either buy back more stock or retire even more debt than you are? Certainly seems like a better use of cash flow to buy back your stock at half of what we analysts think as the intrinsic value than just give it back to shareholders?

Jack Remondi

Mark, that’s a good question. We’re going to spend over almost $220 million in dividends in 2016 and it would clearly be better used in share repurchases. I think when we look at the dividend and we just confirmed and declared the same dividend rate for the first quarter here. We’re really not looking to create or add to some of the investor concerns about liquidity access, what it means and so while we debate at that topic, I think it’s best that we keep the dividend rate as it stands today.

Mark DeVries

Do you think you could address this by announcing like a simultaneous cut to the dividend and increase to the repurchase authorization?

Jack Remondi

Yes, no, I think, I mean it makes economic sense. I don’t disagree with that. It’s really – it’s growing, making sure what the market sentiment is a reaction to that, when there is already concerns about liquidity.

Operator

Your next question comes from the line of Lee Cooperman from Omega Advisors.

Lee Cooperman

Thank you. It’s a little bit of a different approach to prior gentleman who asked this question. I am going to give you credit for knowing more about your business and its value than myself, given the complications and actually my confidence in management, I think you guys do a very fine job and you keep us informed. I wanted to verify some numbers and better understand the motivation for the buyback. I think you’ve given all the answers. You said that the net present value in the high teens, low 20s, you strongly agree, et cetera. And this is my observation. In 2014, you spent $600 million to buy 30.4 million shares, you paid $19.70. In 2015, you spent $945 million, or 56 million shares at $16.88. On 12/31/ 2015 you said, you had $755 million left, you bought $55 million worth of stock, 5.4 million shares, you paid $10.19 so far this year and you have left $700 million which I believe is roughly 23% of the market cap of the company. Why are we not – and the stock is somewhere between 6% and 7%. Why don’t we engage in accelerated repurchase and spend that $700 million now because we’re seeing with the stock so far disjointed from the economic realities as you portray them, and being uncertain environment in the market which creates this opportunity, it seems to me that we should really accelerate the repurchase program retire [22 within the company] and by the way, unless I am missing something, if you bought back 23% to the company at call it, $10 or $11 and you think the real value to low 20s, that creates significant value to remaining shares, so the value goes up, not exponentially but goes up quite significantly. So my question is, we paid the prices of $20, $17 for so much stock, why don’t we accelerate it, how dangerous it is, how risky is it to buy 11 months in advance today? I am going to leave the operational questions to my partner, Mahmood who knows more about the business than me.

Jack Remondi

So well, first of all, thank you for your comments on our confidence here, we appreciate that. We are being aggressive on our share repurchase programs and as we begin the process here after the earnings call, I think you'll see us be more aggressive than we were in the first month of the year to acquire those shares. If you look at the daily trading volume we are already through the first month of the year acquiring roughly a little over 10% of trading volume. So we’ve been fairly active to begin with. And to the extent that we can accelerate those and capture today's prices which we totally agree are far, far below the net present value or the intrinsic value of the company. We should hit -- we will continue to do so.

Lee Cooperman

Yes, I don’t know what your limitations are but I noticed the other day that Ashland, the ASH symbol accelerated a very large repurchase program and this is commonly done, I guess, through -- separates the men from the boys is making these right judgments, if you really believe your business is worth more than twice what is trading for, and you can legally engage an accelerated repurchase, I would strike when the iron is hot, rather than when everybody's optimistic and the stock is trading at a more realistic level. But I will shut up and just try to plant that seed, it seems to be the most logical thing to do. So thank you and good luck.

Operator

Your next question comes from the line of Sanjay Sakhrani from KBW.

Sanjay Sakhrani

Thank you. Good morning. I just wanted to clarify the commentary, Somsak, on the private loans, student loan NIM. So assuming the spreads remain static as they are today prime to LIBOR, your NIM would probably be much higher than what you are guiding to, right? I understand you're looking at the forward curve assuming rates might go up across the year but if that gets deferred, delayed and that gap doesn’t happen, your NIM should outperform your expectations?

Somsak Chivavibul

Yes.

Sanjay Sakhrani

And then I guess following up, Jack, given your opening remarks on the impact of the Moody's downgrades, potential downgrade. I was wondering what your discussions with the agency lead you to believe in terms of their understanding of the gravity of the situation. I am just still surprised we haven't gotten any clarity yet.

Jack Remondi

Yes, I think we’re all surprised or disappointed that the analysis has not been complete yet. This has been a long, long process and too long obviously. We’ve provided -- part of the issues here I think are just the significant complexity of the programs and not just understanding what options are available to borrowers but how they interconnect. And as the analysis -- and you can see from the reports that we published, and we shared everything on our website with what we've responded to both Moody’s and Fitch. You can just see that there's a fair amount of complexity here. I do think we made some excellent progress with both Moody’s and Fitch on this topic helping to provide the data that they need to -- that can drive assumptions or stress scenarios that can at least theoretically happen, instead of impossible to happen. And we are continuing to work with them. We do – do make them aware of the consequences that the delays are having in the financial markets and across our capital stack. And they assure us they are aware of them and working hard to get this resolved as quickly as possible.

But as I said in my comments, our plan to come to market now ahead of likely a decision -- final decision from the agencies is really a reflection that we need to – you just can’t wait forever for the process to unfold here. And I do think we’ve got enough information out there that investors can make informed decisions and understand that any new deal won't be subject to – we’re doing the right things to make sure any new deal won’t be subject to downgrade risk base on new criteria.

Sanjay Sakhrani

Maybe a similar question on the CFPB issue, I mean we haven't really heard much from them as well. I was just wondering if you guys have any thoughts on kind of timing?

Jack Remondi

We don't. There hasn’t been any kind of meaningful activity here on that particular topic. Again I think the process that we have utilized here as we engage with regulators is to be responsive to their needs, make sure that they understand the purpose of our policies and practices. For Department of Education loans, I mean a lot of the typical consumer arguments is that someone is doing something that generates more interest or fees or whatever for the lender in the Department of Education loan servicing side, we have – we don’t benefit from any duration extension or get harmed by duration shortening. We don't – there are no fees that are assessed to consumers and our job is really to work with the customers according to the guidelines of the Department of Ed set for us and within the fee structure that they pay us to help customers find solutions that make sense. And we’ve touted this number more times than I can count but our customers default at a 38% lower rate than all other services combined. Our view is helping customers stay out of default and no one works harder to collect a liability due to them than the federal government. Keeping them out of default is the best thing that we can do and it helps to minimize their expenses and the total cost of loan ownership and we excel at that.

Operator

Your next question comes from the line of Eric Beardsley from Goldman Sachs.

Eric Beardsley

Hi, thank you. I just wanted to dig in a little bit into the OpEx guidance of less than $930 million. I guess relative to the fourth-quarter run rate, excluding the regulatory costs, what are the moving parts for us to think about next year, or I guess I should say this year?

Somsak Chivavibul

Well, Eric, that $930 million guidance reflects really the full year impact of the Gila and Xtend acquisition. One of the things I will remind you is that the Xtend acquisition happened in – towards the latter end of October, October 22 I believe. And so as a result, you’re going to picking up close to a full year’s operating expense load for Xtend Healthcare and to a certain extent you’re going to see an increase in expenses for Gila also. So if you were to -- like I said, if you were to strip out the two -- the expense impact from the two companies, we expect to see a 6% reduction in operating expenses year-over-year.

Eric Beardsley

So, next year, it's really the elevated -- or maybe just say that you don't have any cost savings on a net basis because you have further investments in those two businesses. And I guess what kind of revenues are we seeing on the other side of that?

Somsak Chivavibul

Well, on the other side of that, as we noted during my comments, our full year non-federal student loan related asset recovery revenues increased by $70 million from 2014 to ’15, and most of that increase really came from the impact of Xtend and Gila.

Eric Beardsley

And I guess the guidance for $620 million to $630 million of the business services revenue, is there a way to think about how much of that is from student loans and how much is from the non-student loan business?

Somsak Chivavibul

Just a clarification that, that guidance is – that range is $620 million to $650 million. And then just as a frame of reference, our non-federal student loan asset recovery revenue was $118 million in 2015 and we expect that to grow fairly aggressively given the fact that we've got a full year of Gila and Xtend that we’re going to incorporate.

Eric Beardsley

And do you have any clarity at this point in terms of the new allocation model that the Department of Education will be using on the servicing side?

Jack Remondi

No, not yet. They have not issued their numbers yet for the first six months of the year.

Operator

[Operator Instructions] Our next question comes from the line of Mark Hammond from Bank of America.

Mark Hammond

Thanks for taking my questions. I have two or three here. You mentioned a plan to meet unsecured debt maturities. By my numbers, you don't have to come back to market in 2016. So, would you share some details of that plan you mentioned to explain why you'd be back in the market on the unsecured side in 2016?

Jack Remondi

Sure. So our goal is to raise liquidity well before it’s needed and certainly to the extent that we can issue unsecured debt, we can take advantage of opportunities that the market is presenting today to buy back unsecured -- older issues of unsecured debt with near-term maturities at attractive prices. I think one of the things for investors to keep in mind is that trading prices of our debt are not necessarily reflective of economics to us because most of those are fixed-rate securities that we have swapped back to floating, and even bonds that might be trading over par could still produce economic gains for us as we unwind the hedge as well.

Mark Hammond

So, your bonds are between 9% and 10% in the long end of the curve, call it, ‘24 even out to the ‘33s]. So, what yield would you want to issue at, that would be advantageous and what's the roadmap to get that yield down to the area that you'd like it?

Jack Remondi

Well I think for us it's going to really be – so as I said our plan is not to come to market in the first part of 2016, because these spreads are too high. But it really depends on how we can use it and how we can put that fund -- those funds to work. And the fourth quarter of last year is a good example of what we did, when we tap into two new forms of financings for this company, securitizing our non-traditional loans and borrowing against the over-collateralization in some of our private credit ABS trust, those transactions not only just demonstrate that we can actually tap funding off of our balance sheet but more importantly do so at substantially lower rates than our unsecured debt costs as you just mentioned.

So when we look at our funding alternatives, that's exactly what we do. We look at what the alternatives are and what the use of proceeds are and make decisions accordingly. I like our balance sheet as it sits today. I like our liquidity position. We’re not in a position where we’re being forced to issue -- to do things. Obviously the ability to declare and get authorization for a $700 million share repurchase program speaks about the confidence in our cash flows and we plan to utilize that as I said, so we are in good shape. And the last thing I would just say is that we recognize here that our ability to produce value for shareholders is dependent upon us having a stable access to the unsecured market. So both sides – we have both of those investor groups in our mind here.

Mark Hammond

And then my last question is more of just an idea. So, instead of accelerating share repurchases, which would favor shareholders over bondholders, why not buy your ‘33s that are trading at $0.67 on the $1 today, booking a gain of $0.33? So, that would benefit shareholders and bondholders at the same time.

Jack Remondi

We have bought some of those bonds back in 2015. They are very thinly traded and when their opportunities present themselves we are usually there.

Operator

Your next question comes from the line of Richard Shane from JPMorgan.

Richard Shane

Thanks, guys. Can you hear me this morning?

Jack Remondi

Yes.

Richard Shane

Excellent, okay. Sorry, we are having a little bit of a phone problem here. Anyway, just want to talk a little bit about the maturity wall, Jack. You had talked about -- you'd addressed the 2018 wall. Historically, it looks like the pattern is, entering the year you try to knock down the maturities to about $1 billion, $1.1 billion, before you get into the year, and then address that during the year. With the big spike in 2018, is it possible that you will approach this by leapfrogging the 2017 maturities, and start knocking away at the 2018 and 2019 wall?

Jack Remondi

First of all, the phraseology of a wall here -- these numbers are larger in ’18 than they are in ‘17 but they’re certainly very manageable for us and much much lower than they had been in prior years. Our goal is to –so where would we play? We would play where we have and can drive the most economic value and as we get closer to the ‘17 debt maturities, they tend to – there tends to be little economic value that we can extract by repurchasing them in the new open market other than carrying costs, right? So we end up with liquidity on our balance sheet ahead of the -- in preparation for the debt maturity. So ‘18 has been -- as we said it really at the end of 2015, our focus has been ’18 and then as we move into ‘16 it's going to push those – push that out a bit.

End of Q&A

Operator

There are no further questions at this time. I will turn the call back to the presenters.

Joe Fisher

Thank you, Shannon. We’d like to thank everyone for joining us on today’s call. If you have any other follow-up questions, feel free to give me a call. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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