Sallie Mae Preferred Opportunity

A couple of days ago, Sallie Mae (SLM) announced that they would split the company into two to increase share holder value. 

Company A will be “an education loan management business comprised of the company’s portfolios of federally guaranteed (FFELP) and private education loans, as well as most related servicing and collection activities.” It’s “principal assets are likely to consist of approximately $118.1 billion in FFELP Loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets; and a leading education loan servicing platform that services loans for approximately 10 million federal education loan customers, including 4.8 million customer accounts serviced under the company’s contract with the U.S. Department of Education. In aggregate, this company will own approximately 95 percent of Sallie Mae’s existing assets and remain obligated for the company’s senior indebtedness.”

Company B wil be a “private education loan origination and servicing businesses.” The “assets are likely to include approximately $9.9 billion of total assets comprised primarily of private education loans and related origination and servicing platforms; cash and other investments; and the Sallie Mae Upromise Rewards program.”

The transaction is expected to close under a year. Here is the slide deck. I have never been a fan of SLM’s business, but there may be an opportunity in the preferreds.

I wrote about the floating rate preferred (SLMPB) a couple months back. The preferred went down a bit after the announcement after Moody’s downgraded all debt and preferred because they would be lumped with Company A. However, a funny thing happened, a reader of hypezero emailed me saying that it is possible that the preferred could be redeemed at full par value ($100, currently trading below $70) at the day of the announcement. Here is his explanation:

  • “Unlike bondholders, Preferred Shareholders are owed a “Fair Allocation” in NewCo. If the plan is to redeem the Preferred Shares before spin-off, obviously no “Fair Allocation” in NewCo. is necessary.  Since no disclosure/guidance on Preferred “fair Allocation” was provided I expect the shares will be redeemed prior to spin off.”

I was a bit skeptical, but yesterday/today it is up over 10% on huge volume. The volume yesterday was over 1 million compared with the average volume of 64,000+  Maybe someone with more resources has figured this out as well. The other explanation I thought could make sense was in the preferred prospectus. It says:

  • “The board of directors maintains a committee whose purpose is to monitor and evaluate our proposed actions that may impact the rights of holders of our outstanding preferred stock.” Obviously, this split would be a detriment to the preferred. Here is a link to the prospectus.

Risks

Obviously, there are risks to this investment:

  • The planned split off does not go through.
  •  The preferred is just part of Company A making it a riskier investment. An analyst did ask about the preferred on the call and the CFO said that the preferred will stay with Company A.

Disclosure: I am long SLMBP

 

Arbitrage Opportunity on Genie Energy

Genie Energy (GNE) reported yesterday that will renew its offer to exchange common shares for preferred shares (GNE-PA). I reported about the interesting exchange offer last month.

To recap the offer, investors have the right to exchange their common shares on a one to one basis for the preferred shares. The preferred has the following features:

  • Has a liquidation preference of $8.50 per share.
  • Annual dividend of $0.6375 per share.
  • Redeemable following October 11, 2016 at 101% of the Liquidation Preference plus accrued and unpaid dividends.
  • Redeemable following October 11, 2017 at Liquidation Preference plus accrued and unpaid dividends,
  • Genie does not have to redeem the issue at all.
  • It is senior to the common shares.

This presents an interesting option because the common stock is trading around $6 and the preferred is trading around $7.  You could potentially buy the shares of the common stock at $6 and exchange it for 7 after conversion.

Obviously, you could short out the preferred. However, there is not much liquidity on the preferred.

I was able to buy shares at $6.01-$6.15 this morning. I expect the common and preferred to converge.

At current common stock price ($6 and change), you are getting a yield of over 10% (.6375/6). Like I said, they should have no problem paying interest on the preferred for a while, since they have a strong balance sheet. 

Disclosure: I am  long GNE

Gne Preferred Start Trading

Gne Preferred (GNEPA) started trading today. As expected, the volume is really low. As of 12pm EST, there has been 1750 shares traded and the stock is $7.89. It is trading at around a 8% yield. Investors who exchanged the common shares are making a profit at the current price. The common was around $7.30 when the shares were exchanged one for one.

The dividend should be safe since GNE has plenty of cash and only 1.6 million shares are outstanding. GNE will only have to shelve out $1 million yearly on dividend payments. I expect the preferred to trade in the $7-$8 range. 

Read our article on GNE here.

Disclosure: I do not own shares of GNE.