SLM Corp.'s planned $2.5 billion securitization of FFELP loan receivables made news for a couple of reasons. The student-loan ABS issuer broke its four-month abstention from the ABS market, just as the House of Representatives passed legislation that threatens to terminate its $25 billion buyout by J.C. Flowers & Co., Bank of America, JPMorgan Chase and Friedman Fleischer & Lowe.

The House passed the College Cost Reduction Act of 2007 last Wednesday, which proposes to reduce the special allowance payments made to college tuition lenders by about 10 basis points for loans made after July 1. It would also reduce the exceptional performer guarantee rate to 95% from 97% and to 97% from 99%, according to market sources. The proposals would essentially use the savings to increase Pell Grant scholarships and enact other policies meant to reduce college funding costs for students.

That same day, Sallie Mae acknowledged a message it received from the buyout entity. In it, the group said it believed the House and Senate proposals "could result in a failure of the conditions to the closing of the merger to be satisfied."

Sallie Mae said it strongly disagreed with that opinion, and said it would push to close the merger as quickly as possible. In Securities and Exchange Commission filings, the company said it hoped to close the merger by mid-February 2008. The buyout group would pay Sallie Mae's shareholders $60 per share, about a 28% premium. Under certain conditions, Sallie Mae might have to pay a fee of $900 million if it walks away from the transaction.

The more market-specific problems with the proposals are that the reduction of guarantees for exceptional performers, could result in higher losses that would need to be covered by credit enhancement, market sources say.

If the buyout goes through, it will definitely not change Sallie Mae's plans to continue securitizing student loans, and for good reason, according to the company. Sallie Mae noted that since the announcement of the merger, credit spreads on its unsecured debt widened considerably, thus significantly increasing its cost of financing in the unsecured markets.

"As a result, in the near term, student-loan securitizations will be the only source of cost-effective financing," the company said in its first-quarter 2007 statement. "We believe the market for these securities will be available to meet our long-term funding needs for the foreseeable future."

Shortly before the merger announcement, Sallie Mae came to market last March, when it tapped the securitization market for $5 billion worth of financing. - DM

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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