Sallie Mae to Sell Its $2.5 Billion Stock

Reston student loan company, SLM Corp. announced on Wednesday that it would try to raise $2.5 billion by selling stock through public stock offerings to help satisfy its agreement to repurchase its shares.

SLM, commonly known as Sallie Mae, said it plans to use $2 billion of the proceeds from the planned stock sales to repurchase 44 million shares. Sallie Mae had in recent years committed to buy its own shares at a set price in the future essentially, betting that its shares would rise.

The gamble didn’t pay off due to the great decline in stock value of Sallie Mae. This happened because of the felling through of a proposed buyout of the company earlier this month. A group of investors, led by private-equity firm J.C. Flowers & Co., had placed a $25 billion takeover bid, offering $60 a share for Sallie Mae but the deal didn’t work out and fell through.

Sallie Mae's business took further thumping when the Congress slashed billions in subsidies to student-loan companies. All this led to a great deterioration in the stock value of Sallie Mae.

The declining stock price has put Sallie Mae in a dilemma because the company is obligated to buy more than 44 million of its own shares from Citibank by Feb. 22 at $45.25 each.

To overcome this predicament, Sallie Mae said it would raise $2.5 billion through "concurrent" offerings of both common stock and convertible preferred stock. But that would lead to a dilution in value for current holders of the company's stock adding to the shareholder’s losses. The company however said that settling the contract would have the more positive effect of buying back about 44 million shares of common stock out of about 413 million shares outstanding.

The announcement of the proposed offerings of common stock and mandatory convertible preferred stock came late in the evening when the stock market had closed. In regular trading, SLM rose 7 cents, to $22.13. In after-market trading, however, shares traded at $20.69, down $1.44 or 6.5%.

SLM plans to raise $1.5 billion by selling common stock. This would require the sale of 73 million shares of common stock if it prices the shares at $20.50 each. The company also plans to raise $1 billion by selling preferred stock that would have to be converted into common stock, but it did not give details of the pricing or terms of those shares.

SLM had entered into an agreement with Citibank to pay $1.99 billion to buy back 44,039,890 shares of its stock. It had signed contracts requiring it to buy back the stock over the next several years, but the company’s falling stock price last week gave the banks the right to force immediate purchase of many of the shares. SLM negotiated the deal with Citibank to delay the purchase.

These obligations, called "equity forward contracts," were a double-edged sword that had the potential to generate huge gains for Sallie Mae when its stock price was soaring. They produced an unrealized gain of $796 million in the quarter ended June 30. But in the next quarter, when Sallie Mae’s stock price tumbled, these contracts contributed to losses.