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Sallie Mae sells bonds in first offering since June 2008

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, March 18, 2010

Sallie Mae, the student loan giant, sold $1.5 billion of unsecured bonds Wednesday in its first such offering since June 2008.

The deal, another milestone in the recovery of the financial markets, attested to investors' appetite for corporate debt that borders on junk status, analysts said.

"Even during the credit recovery of last year, there were still names that couldn't access the high-yield market. Just in recent weeks we've seen that change," said Jim Vogel, an analyst at FTN Financial.

The offering came as Congress prepares to vote on legislation to overhaul the federal student loan program, leaving a more limited and potentially less lucrative role for private lenders such as Sallie Mae. Instead of allowing private lenders to issue loans that are guaranteed and subsidized by the federal government, the government alone would issue the loans.

Commercial lenders could continue to issue loans without government backing, and they could end up helping to administer government lending.

In a report issued Monday, analysts at Citigroup predicted Sallie Mae "could look radically different by the end of this year."

The Reston-based lender is considering converting itself into a bank-holding company, the Citigroup analysts wrote. Sallie Mae management had resisted that idea because they thought it would require the company to maintain too much capital, the analysts wrote.

As Sallie Mae seeks money to issue private loans, bank deposits could be a cheaper and more reliable source of funds than the debt markets, the report said.

The 10-year bonds sold Wednesday promise an 8 percent interest rate, although they initially yield 8.25 percent because they were priced at a discount. A Sallie Mae spokesman did not return a call seeking comment.

Two major bond-rating agencies, Fitch and Standard & Poor's, awarded the bonds their lowest investment-grade rating, according to a source involved in the offering who spoke on the condition of anonymity because he was not authorized to speak publicly. A third, Moody's, rated the bonds high-yield, also known as junk.

Sallie Mae has had a sometimes tense relationship with bond investors. In 2007, it angered some by announcing a plan to sell itself in a leveraged buyout shortly after issuing a batch of unsecured bonds. The sale, which would have saddled the company with additional debt, unraveled as credit markets tightened.

Moody's analyst Curt Beaudouin predicted Wednesday that if Congress approves the overhaul, Sallie Mae will have a profitable future servicing government loans and issuing private loans.

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