ADVERTISEMENT

ADVERTISEMENT

Sallie Mae shares sink with details of offering

Associated Press

WASHINGTON — Sallie Mae’s planned $3 billion stock sale doesn’t answer all of Wall Street’s questions about the struggling student lender’s future.

While some analysts see the company’s financing woes as a short-term problem, others highlight serious concerns about the Reston, Va. company, such as soaring loan defaults and a potential cut in its credit ratings.

Sallie Mae, formally known as SLM Corp., earlier this month lowered its earnings forecast for next year by more than 13 percent, blaming a new law that trims federal subsidies and the need to conserve cash to offset bad student loans. Then, CEO Albert Lord held a contentious conference call last week in which he dismissed several analysts’ questions and ended the call with an expletive.

These developments only compounded pressure on the company’s stock price, which has fallen steadily since July, when a group of investors who eventually backed out of buying Sallie Mae for $25 billion first indicated the deal could be in trouble.

ADVERTISEMENT

Shares fell $2.48, or 11 percent, to close at $19.65 on Thursday, a day after the company said it would spend $2 billion from the stock offering to settle unprofitable contracts that require it to buy back shares at above-market prices. The company’s shares have plunged to their lowest price since early 2001.

Sallie Mae released more details on the stock sales Thursday night, raising the total amount to $3 billion from $2.5 billion.

The company said it would sell nearly 102 million shares of common stock at $19.65 per share, up from the 70 million shares disclosed in a regulatory filing earlier in the day. The company also said it would raise an additional $1 billion by selling preferred stock that will convert to common stock in three years.

Both offerings are expected to close on Monday, the company said.

Sallie also disclosed in a regulatory filing earlier in the day that federal education officials plan to examine whether the company’s billing practices complied with federal law. The company also noted a discrimination lawsuit filed against it last week in a Connecticut federal court by two women who alleged the company charged higher prices to students at schools with high black and Hispanic populations. The company denied the allegation.

Several Wall Street analysts on Thursday lowered their 2008 earnings forecasts for Sallie Mae as per-share profits are likely to drop due to the addition of stock. But some said Sallie is likely to benefit in the long run from continued growth in the student lending market as smaller competitors retreat due to tougher business conditions.

"Long term opportunities within student lending remain robust," Mark Sproule, an analyst with Thomas Weisel Partners, wrote in a note to clients.

Other analysts were more skeptical.

ADVERTISEMENT

Goldman Sachs analyst James Fotheringham on Thursday said in a research report that Democrats could push to diminish the role of Sallie Mae and other private companies in the student lending market. He also foresaw pitfalls if Sallie Mae’s executives seek to acquire other lenders — a strategy Lord mentioned last week.

At the moment, Sallie Mae executives are scrambling to cope with problems on several fronts.

The company is taking steps to unwind agreements that allowed it to profit through stock buybacks when shares were rising. Those contracts turned into a problem when the company’s share price fell.

Sallie Mae has been forced to spend $2 billion, raised through the stock offering, to close out the contracts with Citigroup Inc. by Feb. 22. Citigroup agreed last week to assume responsibility for those contracts from other investors.

A Sallie Mae spokesman said in an e-mail that the transaction would close out all such contracts.

In offering documents filed Thursday with the Securities and Exchange Commission, Sallie Mae said it would use about $2 billion raised through the stock offering to buy back 44 million shares at $44.25 per share. The remainder would be used for general corporate purposes. Sallie Mae had 414.1 million shares outstanding as of Sept. 30.

Taken together, the offering and the share buyback would add 26 million new common shares.

UBS AG and Citigroup are jointly running the offerings.

ADVERTISEMENT

While the company said last week it intended to raise more capital to shore up its credit, Sallie Mae said in the SEC filing that it cannot reassure investors that the stock offering will raise enough capital to maintain its credit ratings. The company also said it may issue additional common stock "to maintain, and ultimately improve our credit ratings."

The company also said in offering documents that it is in talks with 10 financial institutions to replace a $30 billion interim line of credit before Feb 15. In addition, the company said it will examine in the second half of 2008 whether to reinstate its now-suspended dividend.

Earlier this year, a group of investors led by private-equity firm J.C. Flowers & Co. reneged on its $25 billion offer to buy Sallie — and brushed off Sallie’s attempt to revive the transaction at a lower price — in part because of a new law reducing federal subsidies on student loans.

The student-loan law, which took effect Oct. 1, cut billions of dollars in federal subsidies for student lenders like Sallie, which lost $344 million in the third quarter.

What To Read Next
Fundraising is underway to move the giant ball of twine from the Highland, Wisconsin, home of creator James Frank Kotera, who died last month at age 75, 44 years after starting the big ball.