Sallie Mae comfortable with debt maturities, still looking to improve ratings, funding costs

By Jennifer Lanning Drey

Savannah, Ga., April 21 - SLM Corp. (Sallie Mae) is comfortable with its maturity profile but will not be fully satisfied with its capital structure until its credit ratings and funding costs improve significantly, Jonathan Clark, Sallie Mae's chief financial officer, said Thursday during the company's first-quarter earnings conference call.

"Our unsecured debt, while less expensive than before, is still too expensive," Albert Lord, Sallie Mae's chief executive officer, said during the call.

In the first quarter, Sallie Mae repurchased $825 million of its unsecured debt, reducing its 2014 debt maturities to less than $3.1 billion. At the beginning of 2009, Sallie Mae had $5.4 billion of debt maturing in 2014, Clark noted.

Also during the first quarter, Sallie Mae raised $2 billion through unsecured debt and issued $812 million of Federal Family Education Loan Program asset-backed securities.

Subsequent to the end of the quarter, the company priced $562 million of private education loan asset-backed securities below Libor plus 200 basis points.

"Going forward, we intend to be a programmatic issuer of private credit ABS and bring deals to the market on a regular basis. We believe this will create a more durable and liquid market for our securities," Clark said.

Core earnings improve

For the first quarter, Sallie Mae reported net income of $175 million, compared with net income of $240 million in the same period of 2010. Core earnings were $260 million for the first quarter, versus core earnings of $215 million in the comparable year-ago period.

The primary difference between the core earnings and GAAP results is a $133 million unrealized mark-to-market loss on certain derivative contracts recognized under GAAP but excluded from core earnings. Sallie Mae manages its business segments on a core earnings basis, according to its earnings release.

The company said the year-over-year improvement in core earnings reflected increased net interest income and a lower loan loss provision.

"As important as the numbers is that the direction in virtually every key area is positive," Lord said.

Dividend, stock buyback plans

Also on Thursday, Sallie Mae declared its first quarterly dividend on its common stock since 2007. In addition, the company authorized the repurchase of up to $300 million of outstanding common stock in open-market transactions and terminated all previous authorizations.

Regarding the timing of the stock-related decisions, Lord said, "This company managed to maintain its capital and liquidity through the difficult markets of 2008, 2009. We're in a considerably better environment.

"The company has very visible capital growth, visible earnings and very visible cash flows."

Annualizing both actions would have the company spending roughly $500 million. However, the CEO cautioned that he believes it would be inappropriate to annualize the numbers as a payout ratio.

The net effect of the payments is that the company will grow capital by 10% rather than 20%, he said.

At March 31, Sallie Mae had a tangible capital ratio of 2.3% of assets, an increase from 1.7% a year earlier, Lord later noted.

Based in Reston, Va., Sallie Mae provides saving- and paying-for-college programs.

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