Sallie Mae Posts Record Drop as Lord Lacks Details (Update4)

By William McQuillen


Dec. 19 (Bloomberg) -- Sallie Mae posted a record drop in New York trading as Chief Executive Officer Albert Lord failed to convince investors the company will rebound after an aborted buyout and credit-market distress cut its stock price in half.

Lord, who returned as CEO of the largest U.S. education lender on Dec. 14, said today on a conference call that SLM may cut its dividend or sell shares to raise cash and earn a higher credit rating. SLM Corp., as the Reston, Virginia-based company is formally known, last week lowered its fourth-quarter and 2008 earnings forecasts, citing an increase in borrowing costs.

Sallie Mae's stock has tumbled since July 10, the day before it said a group led by J.C. Flowers & Co. might back out of a deal to buy the company because of legislation that cut federal loan subsidies to student lenders. It sued the group over the failed $25.3 billion deal and rejected a reduced offer.

``Investors were disappointed they didn't get more details,'' said Sameer Gokhale, an analyst with Keefe, Bruyette & Woods in New York.

Sallie Mae fell $5.98, or 21 percent, to $22.89 at 4:02 p.m. in New York Stock Exchange Composite trading. The decline, the biggest since the company went public in 1983, left the stock at its lowest price in more than six years.

The Flowers group, which includes Bank of America Corp. and JPMorgan Chase & Co., offered $60 a share in April in what would have been the largest leveraged buyout of a financial-services company. Sallie Mae traded as high as $58 in July before the buyers grew skittish when borrowing costs became more expensive and Congress passed legislation, signed by President George W. Bush, that cut subsidies to student lenders.

Second Offer Rejected

J.C. Flowers, led by former Goldman Sachs Group Inc. managing director J. Christopher Flowers, said the subsidy cut amounted to a ``material adverse event'' that, under the contract, allowed the investors to walk away. Instead, he reduced his offer to $50 a share in cash and warrants he said would be worth $7 to $10 a share, depending on the company's financial results.

SLM rebuffed that bid and sued in an attempt to force the group to complete the original deal or pay a $900 million breakup fee. Meanwhile, the collapse of the subprime-mortgage market has driven up the cost of funding loans and defaults are on the rise.

``This is not a great time to be financing,'' Lord, 62, said on the call, his first public comments since being named chief executive officer.

Credit Squeeze

The extra yield typically demanded over the 3-month London interbank offered rate on outstanding AAA-rated 7-year bonds backed by private student loans surged to 1.80 percentage points earlier this month, up from about 0.15 point in June, according to data from Deutsche Bank AG.

Reflecting the debt-market liquidity crisis, premiums on similar bonds backed by U.S.-guaranteed loans have jumped to the highest level in at least seven years, from no more than 0.10 percentage point from January 2006 through July to about 0.70 percentage point, Deutsche Bank in New York.

First Marblehead Corp., the third-largest U.S. arranger of securities backed by student loans and a specialist in private loans, said Dec. 7 that it would halt sales until at least next year ``due to uneconomic terms in the current capital markets.''

Lord was recalled as CEO two days after the company said fourth-quarter earnings, excluding some costs, would be 52 cents to 57 cents a share. That compared with an average analyst estimate of 71 cents. The company, which has $160 billion of loans, also cut its 2008 earnings forecast.

Guidance Sought

Lord said his first goal would be to improve the balance sheet and boost the credit rating. The company paid a quarterly dividend of 25 cents a share prior to reaching the buyout agreement. That amounted to an annualized payout of $414 million.

Analysts expressed frustration at the lack of details, as Lord told him to check with investor relations staffers for further information.

``You've go to give us some guidance,'' one pleaded to Lord.

SLM's debt has been downgraded two levels by Standards & Poor's, to BBB+ from A before the April acquisition agreement. Standard & Poor's rates the senior unsecured debt at Baa1, three levels above speculative grade.

The company will also consider issuing shares to raise capital, Lord told investors.

Lord sold more than 1.2 million of his own shares on Dec. 14, the company reported last week.

Credit Insurance Rises

Credit-default swaps tied to Sallie Mae's bonds, which are used to speculate on the company's ability to repay its debt or hedge against the risk it won't, rose 5 basis points to 290 basis points, according to broker Phoenix Partners Group in New York. A basis point on a contract protecting $10 million in bonds for five years is equivalent to $1,000 a year.

Lord was CEO from 1997 through 2005. In May of this year, after the Flowers deal was announced, C.E. Andrews, who had been Sallie Mae's chief financial officer, was promoted to chief executive officer. Lord was named executive chairman last month and given day-to-day responsibility for running the company.