Fitch lowers SLM to junk

Fitch Ratings said it downgraded SLM Corp.'s long-term issuer default ratings to BB+ from BBB- and its short-term issuer default rating to B from F3.

The agency also downgraded the company's senior unsecured debt to BB+ from BBB- and preferred stock ratings to BB- from BB.

The ratings also were placed on Rating Watch negative to reflect downside rating risks arising from news that the company plans to separate the existing entity into two separate servicing/collection and consumer-banking companies.

Fitch said it expects to resolve the Negative Watch when the transaction closes, which is expected to be within the next 12 months.

Assuming the final transaction is similar to what was outlined, Fitch said it will likely downgrade SLM's ratings by one additional notch at that time.

The downgrades reflect a view that the proposed new structure incrementally weakens SLM's credit profile and the position of SLM's debt holders as SLM would no longer benefit from the private loan origination and servicing businesses, the agency said.

At the time of the proposed split, 100% of SLM's assets are expected to be in run-off mode, leaving the servicing of federal student loans and other contingency collections as the primary sources of core earnings growth, both of which are believed to have relatively thin operating margins, Fitch said. These characteristics are not viewed as consistent with an investment-grade rating, the agency said.

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