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