Investing.com -- Moody’s Ratings has confirmed the Ba1 corporate family rating and long-term issuer rating of Nelnet (NYSE: NNI ), Inc. The outlook for the company has been revised from negative to stable.

The affirmation of Nelnet’s ratings is underpinned by the company’s low leverage, strong profitability, consistent cash flow generation, strong asset quality, and sufficient liquidity. However, these ratings are limited by Nelnet’s revenue concentration from federal student loan programs, especially its servicing revenue from its contract with the US Department of Education (DoEd). The company also relies heavily on secured funding, which could limit its funding flexibility in stressful periods. As a student loan servicer, Nelnet is exposed to high regulatory risk.

The shift in outlook from negative to stable reflects an improvement in Nelnet’s profitability and earnings visibility compared to a year ago, and further strengthening of its already robust capitalization. Although Nelnet’s business and investment diversification strategy involves taking on more risks, the stability of cash flows from its core businesses, strong capitalization, and more stable deposit funding largely mitigate these risks.

Nelnet started originating new private student loans in 2021 through its newly established Utah-chartered industrial bank subsidiary. It is expected that private student loans and other unsecured consumer loans originated through the bank will contribute more to the company’s earnings in the coming years. Although Nelnet’s contract with the DoEd, which began last year, is less profitable than the previous contract and continues to produce most of the servicing business’ revenue, the company has been expanding its loan servicing business by winning new servicing mandates. This gives greater confidence in the sustainability and further diversification of its servicing revenue.

Nelnet is currently undergoing a strategic transformation of its business that has traditionally relied on cash flows from its Federal Family Education Loan Program (FFELP) assets and loan servicing. This transformation has led to investments in unrelated business ventures such as renewable solar energy development and tax credits, a fiber optics company, and a collegiate and high school athletics streaming and analytics platform. These investments should further diversify its revenue, but they are less predictable and are not aligned with the company’s historical areas of expertise and scale.

Despite the transformation and the associated uncertainties, Nelnet has maintained a conservative financial profile. It has significantly reduced its leverage and almost entirely funds its business with term securitizations, warehouse facilities, and cash generated from operations. The company also increased its bank deposits to $1.25 billion as of December 31, 2024, up from $848 million at the end of 2023. This provides a more stable and lower cost of funding to support loan growth in the bank.

Moody’s notes that Nelnet faces negative governance risks due to the transition of its business model and the shorter track record of some of its businesses and investments. As a result, Nelnet’s governance issuer profile score is G-3, implying moderate credit exposure to governance risk. Coupled with a social IPS score of S-5 due to higher risks from demographic and societal trends related to the student lending/servicing business, Nelnet has a credit impact score of CIS-4. This implies that ESG factors have a discernable negative impact on its credit ratings.

Nelnet’s rating could be upgraded if the company shows progress in building its private student loan and unsecured consumer loan origination and acquisition business while maintaining strong asset quality and sufficient capital and liquidity levels. However, a material deterioration in the company’s financial performance or a significant increase in management’s risk appetite could lead to a downgrade of the ratings.

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