With the ouster of a boss by a group of new bosses and government investigations, the recent history of student loan issuer SLM Corp. or Sallie Mae is the finance world's answer to "The Sopranos." Unlike the popular cable television show, though, Sallie Mae's story is far from over.

Sallie Mae will find itself in junk territory should its planned buyout be approved. The student loan lender plans to bring as much as $16.5 billion to the leveraged finance markets before the end of the year, according to Fitch Ratings' forward high yield and leveraged loan calendars - $12.5 billion in term loans and $4 billion in high yield bonds. Banc of America Securities and JPMorgan are the underwriters on the deal, which they are also a part of.

The Reston, Va.-based firm plans to use the proceeds to finance its $25 billion buyout by J.C. Flowers & Co. and Friedman Fleischer & Lowe, along with JPMorgan Chase Bank and Bank of America. J.C. Flowers and Friedman Fleischer & Lowe will together invest $4.4 billion and own 50.2% of Sallie Mae, and JPMorgan and Bank of America will each invest $2.2 billion and own 24.9%. SLM agreed to be acquired by the buyout group April 16.

The company expects to have final shareholder approval for the deal late in the year and the debt financing in place before the end of 2007. If the deal is consummated, it will be the largest LBO ever in the financial services industry.

The firms buying Sallie Mae either declined to comment on the deal or did not reply to requests for comment by press time.

Ratings agencies took notice of the highly levered transaction, and both Moody's Investors Service and Standard & Poor's will slash the ratings on Sallie Mae, dropping them to junk territory if the deal goes through as is. S&P already has lowered the company's credit rating by two notches to BBB+' from A.'

"Standard & Poor's believes that when this transaction is completed, and we expect that it will be, financial risks for all classes of existing debt holders will be greatly increased," Ernest Napier, a primary credit analyst with S&P, said in a report. He added that the ratings on the company and its debt would fall into junk territory once the deal is completed, but that the company's BBB+' credit rating accurately reflects its credit standing.

Sallie Mae agreed to the buyout at a critical time. The company, and the student lending industry as a whole, has come under fire for what critics consider predatory lending practices and inappropriate relationships with academic financial aid administrations. Like those in the subprime mortgage market, Sallie Mae and other lenders were accused of lending to people with bad or no credit at exorbitant interest rates. Student lenders, Sallie Mae not included, have also come under fire for paying university financial aid officials who steered students their way.

Five days before signing off on the buyout deal, Sallie Mae agreed to end some of its programs with university financial aid offices and to fund a lending education initiative to the tune of $2 million. The move came after an investigation by the office of New York State Attorney General Andrew Cuomo. Authorities in several other states are also conducting investigations into Sallie Mae and other student loan providers.

Congress has taken notice as well. Connecticut Democratic senator and presidential candidate Christopher Dodd, who is chairman of the Senate Banking Committee, plans to initiate new legislation that would require additional disclosures from lending companies, allow the Federal Reserve Board to track student lending and provide incentives for banks to offer loans at lower interest rates to poor students.

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

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