SLM Reports Loss Amid Higher Costs Reduced Subsidies (Update7)
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Jan. 23 (Bloomberg) — SLM Corp., the largest U.S. provider
of student loans, reported an unexpected quarterly loss of $1.64
billion on increased reserves for defaulted loans and stock
buybacks to settle futures contracts.
The net loss of $3.98 a share compared with net income of
$18.1 million, or 2 cents, a year earlier, the Reston, Virginia-
based company, known as Sallie Mae, said in a statement today.
Excluding losses from derivatives, the company had a deficit of
36 cents a share, missing the 55-cent profit estimate from eight
analysts surveyed by Bloomberg.
Sallie Mae put aside $574 million for student-loan losses in
the quarter, a fivefold increase from a year earlier, reflecting
fallout from the subprime crisis. The company also lost $1.5
billion on so-called forward-equity contracts, in which it agreed
to buy shares at preset prices, betting on an rise. The shares
fell after the collapse last year of a $25.3 billion takeover bid
from investors led by J.C. Flowers %26amp; Co.
“Were a company going through a transition, Sallie Mae
Chairman Anthony Terracciano said at an investors meeting in New
York. He said Sallie Mae is evaluating expenses and seeking to
decrease operating costs. While trying to turn the company
around, Terracciano, named this month, said he remains open to
finding another merger partner.
SEC Request
The company also said today that the Securities and Exchange
Commission asked it on Jan. 17 to provide information about
“disclosures and actions taken last month before and after
stock sales by its directors and executives. The disclosure came
in a document filed with the SEC.
“We are cooperating with the SEC in order to provide the
requested information and documents, Sallie Mae said in the
filing. Chief Executive Officer Albert Lord sold about 1.3
million shares on Dec. 14 for more than $34 million, or about
$27.34 a share.
Sallie Mae fell 33 cents, or 1.7 percent, to $18.69 at 4:06
p.m. in New York Stock Exchange composite trading and has
declined 58 percent in the past 12 months. The price reached $58
a share in July before Sallie Mae disagreed with buyout investors
over the effect of federal subsidy cuts on profit margins.
The takeover agreement reached in April with Flowers, Bank
of America Corp. and JPMorgan Chase %26amp; Co. would have led to the
largest buyout in the financial-services industry. The buyers
grew skittish when Congress debated legislation that cut federal
subsidies to student lenders by $20.9 billion over five years.
The measure was signed in September by President George W. Bush.
First Priority
Flowers said the law amounted to a material change to the
agreement, hurting Sallie Maes profit margins on government-
backed loans. Sallie Mae rejected a revised bid from Flowers and
filed a lawsuit, seeking a $900 million termination fee.
Lord, 62, was Sallie Maes CEO from 1997 to 2005 and
chairman for two years before regaining to day-to-day control of
the company in November.
He apologized for a December conference call in which he
disappointed investors by declining to provide financial details
and ended the session with an expletive. Today, Lord spoke for
only a few minutes before handing the meeting over to Chief
Financial Officer John Remondi.
“My closing comments were offensive, Lord said. “They
were not meant to be closing comments. I cant say it wasnt the
first time I used bad language, but its the first time I did it
before 500 people.
Lord watched the rest of the meeting at New Yorks Waldorf
Astoria from the dais.
Remondi said Sallie Maes first priority is to replace $26
billion in interim financing from the Flowers-led group. The
company has said it is talking to 10 financial institutions.
2008 Forecast
“Were very, very close, Remondi said. “Were pounding
out the last details associated with this facility and expect to
be able to announce something very, very soon.
Remondi said Sallie Maes core earnings this year would be
$1.70 to $1.80 a share. On Dec. 12, Sallie Mae lowered its
forecast to a range of $2.60 to $2.80 a share from $3.25, citing
the higher costs to replace the interim funding from the Flowers
group. The issuance of more than 100 million shares sold last
month will dilute per-share earnings this year. The company
calculated its fourth-quarter earnings on 413 million shares
outstanding.
Sameer Gokhale, an analyst with Keefe, Bruyette %26amp; Woods Inc.
in New York, said he felt better about Sallie Maes prospects
after hearing its executives explain their cost-cutting measures
and plans for lining up interim financing.
Stock Downgrade
“Some investors feared this was a company spiraling out of
control, Gokhale said in an interview after the meeting. “It
really is at a lot of risk near term, but it does seem, based on
todays comments, these issues seem manageable, or more
manageable than they feared.
Standard %26amp; Poors equity analyst Stuart Plesser downgraded
Sallie Mae to “strong sell from “hold and lowered his price
target to $15 from $20. He also dropped his 2008 earnings
estimate by 24 cents, to $1.70.
While Plesser expects Sallie Mae to refinance its credit
line, “we believe that terms will be unfavorable and hurt
margins, he said in a report.
The collapse of the U.S. subprime-mortgage market raised the
cost of borrowing. Another financing source, sale of bundles of
securities backed by student loans, has withered as investors
have shied away from asset-backed debt. First Marblehead Corp.
and Student Loan Corp. have postponed sales of bundled loans.
Core Loss
Credit-default swaps tied to Sallie Maes bonds rose 15
basis points to 490 basis points, prices from broker Phoenix
Partners Group in New York show. An increase in the five-year
contracts, used to speculate on the companys ability to repay
its debt, signals eroding investor confidence. The contracts have
soared 186 basis points this year, according to CMA Datavision in
London.
The company had a fourth-quarter core loss of $138.6
million, compared with a gain of $325.7 million, or 74 cents a
share, a year before. Core results exclude profit or losses from
derivatives investments and hedging, such as contracts Sallie Mae
had entered into anticipating that its stock price would rise.
Sallie Mae has said it will become more selective in the
loans it makes. Yesterday, for-profit education companies,
including Corinthian Colleges Inc., said Sallie Mae had halted
private student loans, which arent backed by the federal
government, for students with high credit risks.
Sallie Mae said Jan. 18 that it is eliminating 350 jobs, or
3 percent of its 11,000 workforce, and is seeking to cut 20
percent of its operating expenses.
The company had lowered its fourth-quarter forecast on Dec.
12, saying core profit would be 52 cents to 57 cents a share,
excluding what it called one-time costs from the failed buyout.
Stock Sale
Sallie Mae this month completed the sale of $2.9 billion in
stock, at $19.65 a share, with $2 billion of the proceeds being
used to pay off its share buyback contracts. Sallie Mae had
entered the contracts betting the price of its shares would
increase. Instead, as the Flowers deal faltered, the price
declined.
“We are obviously disappointed by our fourth-quarter
results, Lord said.
To contact the reporters on this story:
Matthew Keenan in Boston at
