Good morning, and welcome to the Navient Corporate Reorganization conference call. This call is being recorded. Currently, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time. If anyone should require assistance during the call, please press the star key followed by zero on your telephone keypad. At this time, I will turn the call over to Roger Yankoupe, Navient's Head of Investor Relations. Please go ahead.
Good morning. Thank you for joining today's call. With me are Edward Bramson, Navient CEO and Chair of the Navient Board of Directors, and Steve Hauber, Navient CFO. After the presentation, we will open up the call to take your questions. During today's call, we will refer to a corporate reorganization presentation, which you can find on navient.com/investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. As part of the presentation, we will discuss illustrative financial models and statements related to our legacy and continuing businesses. This discussion is meant for illustrative purposes only and is not intended to be a forecast of future results. Actual results in the future may differ materially from those discussed today due to a variety of factors.
Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we may also refer to certain non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and various other non-GAAP financial measures derived from core earnings. Listeners can refer to Navient's second quarter earnings release, which is posted on our website for a complete reconciliation between GAAP net income and core earnings. Thank you, and I will now turn the call over to Ed.
Thank you, Roger, and thank you everybody for joining us this morning. We're going to talk about the presentation that's online about our recent corporate reorganization that we announced yesterday. To provide some context, this was another in a series of strategic moves that we've been making to enable us to increase shareholder value over time. That being the case, I'm not going to go through all of the details of what we've done, which we hope are clear from the disclosures we've made, but I will touch on a few of the strategic aspects as we plough through the presentation. If you go to page three, about a new corporate structure, hopefully what we've done here is pretty clear.
I think the salient point, though, is that we now have our two businesses in separate legal entities, both of which are SEC-registered and will be filing separate financial statements going forward. That's the real point I want to make there. If you go to page four, this just sizes what we are doing at the time of the reorganization. Almost all of the assets that Navient Corporation has are ending up in Navient LLC, which is effectively the successor. We are transferring to our new Earnest subsidiary basically at the moment, the intangible assets that relate directly to it. Over time, because it is doing servicing and originations, it will need some additional working capital. We are not expecting Earnest to be carrying loans for an extended period of time. It will sell those loans to the market or transfer them to Navient.
Earnest will continue to be relatively capital-light, and the capital-intensive business will reside in Navient LLC. If you go to page five, the objectives section. We really restarted originations in a serious way late in 2024, so we did not see a result until 2025. As a result of that, we are getting an increasing divergence between the legacy business and the continuing business, which we call Earnest. We think it is to the point now where we need to get a greater differentiation between the two, and capital intensity is only part of the differentiation. As we focus more on Earnest, it is managed differently, has different growth characteristics, and we think it is a good idea to now start to differentiate how we measure business success.
For the legacy business, we are going to be using a number of metrics, but the key one is going to be the availability of cash after unsecured debt service. In Earnest, what we are doing because we are building the business over time, the success metric here will be return on attributable equity. I think the other point to make is that obviously there are arguments to be made for valuation or other purposes that these companies should be split entirely. We think there are counterarguments at the moment that argue for keeping them together. What the reorganization has done now is in the event that we did decide to make a complete separation, a lot of the work that is required to do that has already been done. If you go to page six, it is just an overview of what the differences between the businesses are.
If you look at the Legacy business. Its portfolio at the end of June was about $40 billion. Three-quarters of that, or thereabouts, is actually comprised of loans of types that we do not make anymore. That is why we refer to those as non-strategic. It is a good loan portfolio, but by its nature, it is shrinking. When you have a shrinking portfolio, despite the fact that we are constantly reducing expenses, you have negative operating leverage. The other thing is most of the assets in the portfolio are securitized. As the securitizations age, the leverage drops, and so the return on equity also comes down. It is not that it is not a good business, but to run it for return on equity or earnings growth really is not the right way to do it.
If you look at the second bullet on the page, what this is is basically information that we disclose, I think, every quarter. So in June, you can see how much cash we had. Every quarter, we forecast the expected inflows from our portfolios, net of the trust debt that is securitized. The new information on the page is the third-party cost of servicing these portfolios over their expected life. As you may remember, back in 2024, we outsourced most of the servicing to a third party in order to variabilize that cost. So at the moment, we're estimating about a $600 million lifetime servicing expense. And I think it's worth saying that had we not outsourced, that number would be a multiple of that.
Anyway, the net of it is, I think that we expect to have coming on to $5 billion of cash after all these items have been paid, but before overhead and before taxes. Whatever those things turn out to be, I think it's reasonable to expect that there'll be several billion of discretionary cash available, and that can be used either for growth or for distribution to shareholders. But if you go to page seven, I think at present, the strategic reason for keeping the businesses together is fairly clear, that the cash flow from the legacy business is available to fund Earnest as it's really in the early stages of its growth. Looking at Earnest, obviously, it has been growing pretty quickly. You can see we're expecting originations for this year at about $3.8 billion.
If you go back to 2023, I think they were probably less than $1 billion. So you're getting a lot of growth in originations. But at the same time, when we began the new strategy, we made a strategic shift, which is to focus on higher quality underlying assets. So that is not an effort to optimize margins. It's an effort to optimize overall efficiency and return on equity. If you look at the second box, you can see that in contrast to what happens in the legacy business, the operating leverage for Earnest through its growth is actually very positive, and that's an element of efficiency. The other thing is in terms of financing efficiency. Because of the, among other things, the change in the nature of the underlying assets, we're able to get a higher proportion of AAA financing in our securitizations than we did before.
All of these things are focused on a strategy of growth, quality, and efficiency. And we think at the moment, as we said, that it's a good combination with our legacy business. What we talked about is what we've done, to some extent why we did it. There's also a question of why we could do it now. There are a lot of reasons for that. But part of the reason for the reorganization is that we're getting ahead of a potential constraint. ATE, that's adjusted tangible equity, the percentage of that is a significant component of our unsecured debt rating. And I'm going to oversimplify, but what it basically is the percentage of tangible equity to our private loans, meaning excluding the ones that are government guaranteed. 90% probably of our assets, maybe more, are securitized. So they're sold in the true sale.
We don't actually own the assets. But under GAAP, we're required to consolidate them. As our change in strategy makes our financings more efficient, they require less equity. That actually puts pressure on the ATE ratio on a consolidated basis. If you look at the range for our current rating today, it runs 8%-12%. At the end of June, we were at 9%. If you go to the next page nine, what it shows is in 2024 when we started, we had about a 10% ATE, which is right in the middle of the range. As we started growing, you can see it's been coming down. It doesn't look like we have an immediate problem in 2027, but if we keep growing like this, certainly as you get out around 2028, this could become a constraint.
The reorganization helps with that in the sense that we want LLC to be our primary holder of loans that we haven't sold. If the ATE ratio for LLC gets too close to the bottom of the range, and we want to keep a reasonable buffer, then we have the option of moving some of the securitizations to the holding company, which takes the related consolidated leverage with it. That's probably a timing issue for what we do. On page 11, there's another item which aren't strictly related to the corporate reorganization. I think the first two of them kind of speak for themselves, so I'm not going to cover them. The third one, though, I think is strategically significant because it represents a change in the philosophy of how we look at our existing loan assets.
In the past, I think to oversimplify what we've done is we add assets, we say, how are we going to finance them? Maybe we add unsecured debt or maybe we do something else. But the way we're looking at it now is that we have a portfolio of loans. Some of them are non-strategic in the sense that we're not getting new customers for those loans. So in the event that you have a non-strategic loan and we have a new loan that we want to make to someone that's part of a growth business for us, we have the option of, in essence, reallocating that capital from the non-strategic to strategic by selling those loans. That's something that we'll look at going forward.
The other thing is that this gives us the option of looking at selling loans to repay unsecured debt that matures or refinancing those loans with a new issuer based on the relative economics. Both of these things, I think are strategic shifts from what we've been doing before. Along that line, our assets are mostly securitized, and if they're not, they will be. I believe that at the moment we've got something like 130 individual securitization trusts, and obviously we're adding some every quarter. So in characterizing those trusts, which we need to do, we have to look at what is the cash flow that they give to us in that particular time period? What is their return on equity? What is their risk retention status? What's their tax position? Are they strategic or non-strategic? I may have forgotten some.
We're going to be in the process of characterizing a lot of the loans that we currently have, trusts we have outstanding on that basis. We've already started, and the first place to start was with our legacy private portfolio. You may recall that in June we classified, I want to say $600 million, something in that range off the legacy portfolio as held for sale. When we report Q3, you'll see that we've added another $1.4 billion of legacy private loans to held for sale. So of the $5 billion-plus of that loan category that we had in June, about $2 billion will be held for sale. This is a fairly long process to complete it for the whole portfolio. But we'll do that, and there'll probably be additional changes after we do. That's really it for the presentation.
I realize the market opens fairly soon, so we don't want to detain you. But I'm open up for questions, but certainly Roger or Micah are available for any questions that come up after the call. Now I'd like to turn to questions.
If you have a question, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Rick Shane with JP Morgan. Please go ahead.
Thanks, guys, for taking my questions this morning. Look, can we talk a little bit about the governance of the entities going forward? You talked about creating two SEC reporting entities. Is each company going to have its own board, its own CEO? How do we think about this going forward?
Well, I should say that Steve Hauber and Roger are with me, so they can certainly chip in. Each of them will have their own boards. The continuing business does have somebody who runs it, Phillip Mattiace . The legacy business right now is reporting directly to me, but we might look at changing that going forward.
I just want to add, this is Steve. On the SEC registrant piece, just to clarify there. They'll be the holding company, Navient Holdings Inc, will be a registrant as will Navient LLC. With both of those entities, you have the typical governance you would see with the board of directors for both of those entities and all the normal related governance structure that you would expect.
Got it. In terms of things like Earnest is going to be an originator. It is going to, it sounds like, sell loans to partners. It's going to sell loans to LLC. How are transactions negotiated on an arm's length basis under that construct?
Yeah, that's something that in terms of the, of course, anything that would be sold publicly, that obviously is at, or to external folks, that obviously would be at arm's length. In terms of the sales from Earnest to Navient LLC, those will be done at a cost basis, which is not uncommon for this type of structure.
Got it. Okay. That is it for me. I guess I am still trying to understand this a little bit and benefit it out here and all that. But to some extent, I guess, I am trying to figure out if we are making the pizza bigger or we are just cutting it into different slices today, and I think everybody is wrestling with that.
Well, think about it and give us a call.
Okay. Thank you.
Thank you. We will move next to Alec Lebowski with Jefferies. Please go ahead.
Good morning, and thank you for taking my question. Just curious on the Earnest standalone structure in 2027, do you expect the business to be profitable in 2027? If not, what is the trajectory? What level of originations or scale does Earnest need to reach before you see that break even?
I think those are all very good questions. What I would say is that we are looking at re-segmenting in 2027 to give better clarity on both sides of the business. I think it would probably be best for us to wait until we have settled on that, and then we can give you a more comprehensive answer. I think that is sort of where we are today.
Got it. Thank you. Just on the legacy business, you mentioned the $4.7 billion of cash from the legacy business. How should we think about allocation between funding Earnest and then returning capital to shareholders? How quickly do you think there could be some distributions? Thank you.
Yeah. On the $4.7 billion, you have, I think, three things to bear in mind. One of them is the timing. Some of that comes in later, some of it comes in sooner. Then you do have to take out taxes and operating expenses. I think we could talk about that another time, but the outlook for those is relatively favorable. If you think about where we are, the simplest thing to do is to buy stock at 40% of book or whatever it is.
We are making an equity bet here that it is better to grow Earnest. I think the way we are going to look at it is that there should be cash for both. As you look at things at the time, you decide whether it is better for shareholders to do buybacks or to invest in originations. We are not going to have any fixed formula. To some extent, the market will determine that.
Got it. That is all from me. Thank you.
Thank you. Once again, if you would like to ask a question, please press the star and 1 on your telephone keypad now. We will take our next question from Giuliano Bologna with Compass Point. Please go ahead.
Good morning. Yeah, thanks for the time. One thing I would be curious about is thinking about the strategy over time. Obviously, this creates somewhat of a split to really identify Earnest and the value proposition of Earnest and the earning potential and capital within that entity and really separate that out, which I think is very helpful for the market to be able to do that.
But over time, in some ways, does this create a better opportunity in some ways to further split off or create an opportunity to sell an equity interest in the legacy runoff asset book? In a sense, would you ever consider taking that as a second step where you could effectively put that out there and put a valuation marker on that in the markets on its own? Would that be helpful in some ways over time to create, in some ways, a true split and have a real market valuation on both sides independently?
I think you certainly could. Right now, we think it is better to keep things together because you are growing something and you have cash to invest in doing it. Both of these things have listings, so you could have equity securities in both. I would say it is not something we have actually looked at at the moment, but certainly that is conceivable based on the reorganization.
That is very helpful. I appreciate the time. I will come back. Thank you.
Thank you. We will move next to Moshe Orenbuch with TD Cowen. Please go ahead.
Great. Thanks. Given that this will obviously shine a brighter light on the returns from Earnest, could you just talk a little bit about how that looks right now given what you've got for yields in the refinance business and then the cost of funds and securitizations, both the last one you did and perhaps how that might have evolved given the rise in rates and spreads towards the end of Q3?
Yes. I think that we're in a transition where Earnest has been principally student loan refinancing, and I think it's fairly well-known that that is a cyclical business. Basically in that area, you'd want to get every customer you can, provided you can afford to do it. So with rates where they are, it's less affordable than it was. But that's why we're now in the fortunate position with our In-School business being in a better strategic position. And moving into PL, we can basically manage the portfolio to get the combination of growth and margin that we think we need. So I agree with you that rates moving up is not helping anything.
Maybe just as a follow-up, how do you think about that from a capital allocation perspective? You're obviously doing a much higher level of originations into that environment as opposed to other forms of use of the capital of the company.
You mean like your buybacks?
Yeah. I am saying, in other words, the returns that you are getting on the incremental dollar of student loan refinance would seem to me to be lower than what your returns could be from a buyback.
You have to look at it that way. There is a strategic issue that it is a difficult one to balance. What is the value in the longer run of growth versus clearly you can make a good case for buybacks today. I do not want to say that we do not have a rigid rule for that, Moshe, but it is something that we have got to look at.
Thank you.
Thank you. That concludes today's call. If you have any follow-up questions, please contact Roger Yankoupe or Micah Andrews. Thank you for your-