SLM Corporation, commonly known as Sallie Mae, announced yesterday that it is to be sold to a group of investors led by two private equity houses for $25 billion. The two private equity players will own 50.2% of the business with Bank of America & JP Morgan Chase splitting the balance. The two banks have also agreed to put a whopping $200 billion in backup financing in place over the next five years. So is this just another in a long line of leveraged buyouts seen recently in the US? Well not exactly.
You see Sallie Mae provides government guaranteed and private student loans in the US, which means that it resides in the financials sector. So what you ask? Well, financial companies were considered less likely candidates for an LBO than most other sectors. Infact many considered them almost LBO proof. The thinking goes that the financial business is either too cyclical to support aggressive leverage and/or requires access to cheap funding that is the preserve of a more conservative balance sheet. In other words, people have always believed that financial companies need an investment grade credit rating to do business – ie a minimum of a BBB rating, and usually at least A. However, there are a number of examples within the sector where LBOs have been achieved and we believe that we could potentially see more in the future. Clearly the largest of the banks may yet prove too big to LBO but those finance companies with depressed share prices (pre LBO SLM Corp share price had fallen 12% YTD) will undoubtedly come under ever greater scrutiny from a private equity community with very deep pockets. So far bondholders in financial companies could have been fairly relaxed about the chances of their bonds getting junked (in other words their ratings cut to BB or below) – not any more.