Last week, Standard & Poor's (S&P) Ratings Services
downgraded its outlook on SLM Corporation ( SLM ) - also known as
Sallie Mae - from 'Stable' to 'Negative'. However, the rating
agency affirmed its long-term issuer credit rating of 'BBB-.'
Reasons for the Downgrade
The rating agency stated that the downgrade was driven by the
company's sale of interest in bonds supported by government-backed
student loans, which resulted in reservations regarding the
probability of future reduction in cash flows from the FFELP
Earlier last week, Sallie Mae declared that it has sold its
remaining interest in SLM Student Loan Trust 2007-4 securitization
to a third party. This was partially due to the legislation passed
by the House and the U.S. Senate in Mar 2012, terminating the
Federal Family Education Loan Program (FFELP) that provided federal
subsidies to private lenders.
However, under the existing contract, Sallie Mae will continue
servicing the student loans in the trust. The sale will result in
the removal of student loans of $3.8 billion and associated
liabilities of $3.7 billion from the company's balance sheet in
Even though the sale constituted a modest fraction of Sallie
Mae's assets, the rating agency believes that it symbolized an
alteration in the company's approach associated with the FFELP
portfolio. Previously, S&P anticipated that the lender would
allow the FFELP portfolio to steadily run off instead of selling
According to management, the company has planned further selling
of its asset-backed securities holdings supported by loans
originated under the Federal Family Education Loan Program (FFELP).
This step reflects the company's shift of focus from FFELP loans to
its private student loan business.
S&P further commented that the residual interests offered
Sallie Mae with opportunities to diversify and expand its various
segments. These include its private education lending segment as
well as the servicing business, which are key growth drivers to
mitigate the negative effect of the waning FFELP portfolio.
The rating revisions play a major role in preserving investors'
confidence in the stock and help boost its creditworthiness in the
market. Though Sallie Mae is working on addressing such issues,
further rating downgrades could take place due to pressure on
future cash flows.
Additionally, suspension of the new federal student loan
origination will continue to impact revenue generation capabilities
of Sallie Mae. However, we believe that the company's efforts to
expand its private education loan business and reduce its loan loss
provision expenses would bolster its earnings.
Further, the company's leading position in the student lending
market and diversifying efforts would help it navigate the current
regulations and sluggish macro environment.
Sallie Mae retains a Zacks Rank #3 (Hold). Financial firms that
are performing well include BankUnited, Inc. ( BKU ), Fifth
Third Bancorp ( FITB ) and
Regions Financial Corp. ( RF ). BankUnited carries
a Zacks Rank #1 (Strong Buy) and the other two hold a Zacks Rank #2
(Buy).BANKUNITED INC (BKU): Free Stock Analysis
ReportFIFTH THIRD BK (FITB): Free Stock Analysis
ReportREGIONS FINL CP (RF): Free Stock Analysis
ReportSLM CORP (SLM): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment