RESTON, Va. – In one of the biggest derivatives losses ever, student loan giant Sallie Mae said it may have lost more than $1 billion betting its own stock would continue rising last summer after it agreed to be sold in a $25 billion takeover.
The $45.25-a-share forward equity contracts looked like a good bet when the $60-a-share deal pushed the stock up to over $56-a-share–putting the company almost $800 million in the black on the deal at mid-year. But the subsequent collapse of the takeover has pushed the shares down below $20, forcing Sallie Mae to buy back 44 million of its own shares from Citibank at $45.25 each.
In an equity forward contract, an issuer sells securities to a buyer for the current stock price. The issuer agrees to repurchase the shares for a greater amount in the future. It amounts to a cheap way to borrow money as long as the company's share price goes up. But if the share price falls, as Sallie Mae’s did, the issuer must buy back the shares at a premium–in this case a big premium.
The student loan giant raised $2.9 billion earlier this week with the sale of common and preferred stock, most of it to finance the massive stock buyback.
Sallie Mae is the largest provider of student loans in the country and buys loans from hundreds of credit unions for sale and securitization on the secondary market.
Sallie Mae, formally known as SLM Corp., is suing the group that terminated the takeover, which is led by private equity partners J.C. Flowers & Co., and banking giants JP Morgan Chase and Bank of America.
