SALLIE’S NEW PLAN ADDS TO STOCK WOES
Shares of Sallie Mae continued to slide yesterday after the nation’s largest student lender announced it will seek up to $2.5 billion of additional capital to shore up its beleaguered balance sheet.
The Virginia-based company said in public filings that it plans to sell 70 million common shares and 1 million preferred shares in the coming days.
Most of the proceeds from the offering, about $2 billion, will go to pay Citigroup for so-called equity forward agreements, in which Sallie had agreed to buy back a set number of its shares at some point in the future in a bet that its stock would rise.
That wager has blown up as Sallie has lost roughly 64 percent of its value, or nearly $15 billion, since its peak this year.
In July, billionaire financier J. Christopher Flowers, JP Morgan and Bank of America agreed to buy the lender for $60 a share.
Flowers then pulled out of the deal several months later amid the credit crunch and regulatory changes in the student lending industry. Sallie continues to fight in court to force Flowers to pay the $900 million break-up fee.
Sallie said in yesterday’s filing that a new law cutting subsidies to student lenders “will significantly reduce, and combined with higher financing costs, could possibly eliminate the profitability” of new loans under the Federal Family Education Loan Program.
“Although we are disheartened by the size of the offering, we note that most of the proceeds will be used to buy back 44 million shares at higher prices, somewhat mitigating the dilutive effect of the offering,” wrote Stuart Plesser, an equity analyst with Standard & Poor’s, yesterday.
Shares of the student lender tumbled nearly 8 percent yesterday to close at $20.41.
The offering could net the two Wall Street underwriters working for Sallie, UBS and Citi, a combined $83 million in fees and underwriting discounts, Dealogic estimates.
UBS lost millions in potential fee income when the $27 billion buyout deal with Flowers fell through.
Sallie said that federal education officials plan to examine whether the company’s billing practices complied with federal law.
Sallie Mae Chief Executive Albert Lord was widely criticized last week after a contentious conference call in which he dismissed several analysts’ questions and ended the call with an expletive.
The company is also in talks with 10 financial institutions to replace a $30 billion interim line of credit before Feb 15.