Sallie Mae Reduces Credit Lines; Moodys Mulling Downgrade

In an 8-K filing with the SEC yesterday, Sallie Mae indicated that they are reducing commitments under their private education loan facility and FFEL loan facility by $2.2 billion and $4.1 billion respectively.  The company will receive a $17.1 million rebate from their bankers for these reductions.  The company stated that this move was made "after an analysis of its ongoing liquidity needs and following its acceptance and funding under the Department of Education’s Loan Participation Purchase Program. For the academic year 2008-2009, the Company expects to utilize the Participation Program to fund all eligible Stafford and PLUS loan originations."

According to Bloomberg, A Sallie Mae spokesperson indicated that the company has less costly options available to them and also that he company hasn't lowered the amount it plans to make available to students.  Sallie Mae is the largest private student lending with an estimated 42.5% of the market based on SLA estimates.  Moodys, however, warned that they may cut its rating on Sallie Mae, based on the fact that "Private education loans are an increasingly important profit engine for the company, and a reduction in the ability to originate and fund these loans could be problematic." 

A ratings cut would increase Sallie Mae's funding costs however it is unclear how that would impact the cost of their private student loans.  Recent disclosures indicate an increasing reliance on their Sallie Mae Bank for funding private loan.  In an 8-K filing on August 14th, 2008, Sallie indicated the following:  "Sallie Mae Bank supports the Company’s private credit lending operations through both loan originations and funding. We expect Sallie Mae Bank to play a growing role in the financing of Sallie Mae's private credit loans."

In mid-day trade, the market seems to be shrugging off the news as SLM is trading down about 1% today in line with the Dow Jones Industrials which was down about .9% mid-day.