Shares of Sallie Mae plunged Wednesday after the CEO said a dividend cut may be needed next year to bolster the student lender’s finances, which have been crimped by rising loan defaults and borrowing costs.
The nation’s largest student lender, formally known as SLM Corp., slashed its 2008 profit forecast last week in the wake of a failed $25 billion buyout, saying it needed to hold onto more cash to offset bad student loans.
A group of investors led by private-equity firm J.C. Flowers & Co. reneged on its offer — and brushed off an attempt by Sallie to revive the transaction at a lower price — in part because of a new law that reduces federal subsidies on student loans.
Shares of Reston, Va-based Sallie hit a new 52-week low and more than 50 percent below the $60-per-share offer made in April by the Flowers group.
Chairman and CEO Albert L. Lord tried to reassure investors about the company’s future during a conference call Wednesday morning, but analysts expressed dissatisfaction with his answers, or lack of them, to their questions.
Despite the company’s financial weakness and falling stock price, Lord said the company would consider using shares to buy out smaller players in the student lending industry.
“This is a very challenging time,” Lord said. “The goal here is to get out of deal mode, and into the growth mode.”
Lord said the company plans to “look at the dividend in the second half of the year,” as it seeks to raise its capital cushion and lower its borrowing costs.
Analysts voiced frustration with what they considered to be a lack of details from Lord.
“We’re trying to figure out what your stock is going to be worth and you’ve got to give us some guidance,” one analyst said. “You’ve got to give some numbers.”
Lord, at the start of the call, acknowledged that many investors are upset.
“I’m quite aware that on the back end of a failed transaction that there are a lot of unhappy people,” said Lord, who gained control of the company in a 1995 proxy contest. “(It’s) ironic, because it was originally unhappy shareholders who originally put me in this seat in the first place.”
Lord, who assumed the chief executive’s seat on Friday and said he plans to stay in the position for at least two years, called his sale of more than 1.2 million shares of company stock to meet margin calls “embarrassing and troublesome to me personally” but not a reflection of diminished confidence in the company’s long-term future.
The failed buyout has landed in court, where Sallie is arguing that the investor group should have to pay a $900 million breakup fee. A trial could start late next year in Delaware Chancery Court.
The flagging financial outlook for the company, which lost $344 million in the third quarter, could bolster the investor group’s legal argument — namely, that it shouldn’t have to pay a fee for abandoning the deal because of significant changes in economic and regulatory conditions affecting Sallie.
A landmark student-loan law that took effect Oct. 1 cut billions of dollars in federal subsidies for student lenders like Sallie. And defaults are mounting on student loans, while credit-market tremors similar to those linked to the mortgage crisis have begun to show up in the $85 billion student-loan market.