Student lender SLM Corp., better known as Sallie Mae, has settled a bitter feud over a failed $25 billion leveraged buyout as a condition of refinancing a $30 billion credit line hanging over the lender.
The deal settles all litigation stemming from the failed buyout and lets private-equity firm J.C. Flowers & Co. escape 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.
Sallie Mae's shares rose 6.3% to $21 in pre-market trading.
Sallie Mae said JPMorgan 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.
JPMorgan and Bank of America took part in the Flowers-led buyout 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 wouldn't disclose terms of the new credit facility, but spokesman Tom Joyce said they are consistent with those envisioned in last week's earnings forecast. He 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," Joyce said.
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 a 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 for the firm.
"The Buyer Group is not and will not be obligated to make any payment of any kind to Sallie Mae," Flowers said in the letter to investors.
The settlement was reported earlier by the New York Times. It comes three weeks after the student lender named financial-services turnaround veteran Anthony Terracciano as chairman following a combative and profane mid-December conference call by then Chairman Albert Lord, who remains chief executive.
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.
Terracciano said on a conference call last week that the company remains open to being acquired.
