The Wall Street Journal-20080129-Sallie Scores Funding As It Ends Deal Fight
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Sallie Scores Funding As It Ends Deal Fight
Full Text (477 words)Student-loan company SLM Corp., better known as Sallie Mae, settled a feud over a failed $25 billion leveraged buyout, securing the refinancing of a crucial $30 billion credit line in the process.
The deal settles all litigation stemming from the failed buyout and lets private-equity firm J.C. Flowers & Co. out of the deal without paying a breakup fee, Flowers said in a note to its investors. For Sallie Mae, the agreement gives the lender access to sizable, new short-term financing while it waits for credit conditions and the markets for debt backed by student loans to improve.
SLM shares were up 57 cents, or 2.9%, at $20.45 in trading yesterday on the New York Stock Exchange.
The buyout deal, agreed to in April, fell apart under the pressure of a souring credit market and tougher legislation that hurt margins in Sallie Mae's key federally guaranteed student-loan business. It was the largest deal to fail after the credit crunch ended a record wave of buyouts.
Sallie Mae sued Flowers, which was seeking to escape paying a $900 million breakup fee by arguing that the legislative changes constituted a "material adverse effect" allowing a penalty-free termination of the deal.
The settlement ends further litigation on the matter. Flowers and its investors won't have to pay the breakup fee, which would have been a heavy burden.
Sallie Mae said J.P. Morgan Chase & Co. and Bank of America Corp. have agreed to refinance the credit line along with a consortium of other lenders, including Barclays PLC, Deutsche Bank AG, Credit Suisse Group, Royal Bank of Scotland Group PLC and UBS AG. The new facility is for $31 billion and a term of 364 days, and is expected to close over the next several days.
J.P. Morgan and Bank of America took part in the Flowers-led buyout effort and extended the original credit line after the deal was reached. Sallie Mae executives warned last week that the mounting costs of refinancing the credit line would hurt earnings for 2008, leaving them below Wall Street's already diminished expectations.
Sallie Mae spokesman Tom Joyce called the scale of the loan commitments a "vote of confidence" in the company. "We have financing in place, and this is not an easy market in which to do financing right now," Mr. Joyce said.
Sallie Mae now must get on with the task of refocusing its business on private student loans and away from the federally guaranteed student-loan business, where margins have suffered following legislation passed last year. The company plans to cut 25% of its costs and tighten risk controls. It will also retreat from a segment of the private student-loan market that produced a sharp jump in provisions against expected loan losses last quarter.
Anthony Terracciano, Sallie Mae's chairman, said in a conference call last week that the company remains open to being acquired.
