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Sallie Mae Bids to Raise $2.5 Billion In Stock Sale

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By David S. Hilzenrath
Washington Post Staff Writer
Thursday, December 27, 2007

Sallie Mae, the Reston student loan company, said yesterday that it would try to raise $2.5 billion by issuing new stock and use the proceeds to help it satisfy a standing agreement to repurchase its shares.

The planned stock sale is part of an effort to extricate the company from a financial bind -- another link in a chain reaction of trouble set off by the collapse of negotiations to sell the company and the collapse of its stock price.

After the stock market closed yesterday, the company said it would try to raise the $2.5 billion by selling both common stock and preferred stock that converts into common shares. Most of that money would be used to settle buyback contracts that have become a millstone around the company's neck.

Sallie Mae had been working for months on a leveraged buyout that would have given stockholders $60 per share, but the deal fell apart. Its stock closed yesterday at $22.13 a share, up 7 cents.

Its declining stock price put Sallie Mae in a bind because the company had previously entered into contracts to buy back its own shares for far more than they are now worth.

The company said in a regulatory filing yesterday that it was obligated to buy more than 44 million of its own shares from Citibank by Feb. 22 at $45.25 each. Sallie Mae recently renegotiated the terms of the contracts, eliminating triggers that could have required it to fulfill its obligation sooner.

In a separate announcement later yesterday, the company said it plans to use $2 billion of the proceeds from the planned stock sales to repurchase 44 million shares, though it did not name the seller.

The 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, they contributed to losses.

Issuing new stock can dilute the value of shares investors already hold. That would add to Sallie Mae shareholders' recent losses.


© 2007 The Washington Post Company

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