Sallie Mae's Stock, Preferred Sales Raise $3 Billion

Sallie Mae, the largest U.S. educational lending company, said it sold $1 billion of convertible securities and $2 billion of common stock, raising more money than it had expected to pay off bad derivatives bets.

Sallie Mae sold common stock at $19.65 a share, equal to the company's closing share price on Thursday. The common stock sale offering was increased from an originally planned $1.5 billion, signaling strong demand.

The mandatory convertible preferred securities will offer a dividend of 7.25 percent, until investors convert them into common stock, or until their mandatory conversion on Dec. 15, 2010.

Sallie Mae, formally known as SLM Corp, said on Wednesday it was issuing $2.5 billion of convertible preferred securities and common shares, with about $2 billion of the proceeds going to pay off losses on derivatives known as equity forward contracts.

Sallie Mae used equity forwards as part of its share buyback plan for years. The contracts allowed the company to reduce the cost of buying back its shares as long as its stock price kept rising.

But if, as happened, Sallie Mae's share price fell far enough, the company had to buy back a large number of shares at above-market prices.

In this case, Sallie Mae will use about $2 billion from its offering to buy back about 44 million shares, now worth closer to $865 million at current market prices. The rest of the proceeds will be used for general corporate purposes.

Sallie Mae stock fell 11.2 percent to $19.65 on the New York Stock Exchange, their lowest closing level in about seven years.

Sallie Mae's shares have fallen about 60 percent this year, as its efforts to sell itself to a buyout group failed and investors fretted that turmoil in the securitization market would lift its borrowing costs.

Recent legislation that cut subsidies to student lenders is also seen crimping its profits.

Sallie Mae said in a prospectus for the offering that the slashed subsidies, combined with higher financing costs, could reduce and "possibly eliminate" the profitability of the student loans.

In the prospectus, filed with regulators, Sallie Mae also said it plans to pursue higher-margin private loans and "curtail less profitable student loan acquisition activities."

The filing also showed it faced a federal inquiry into its billing practices, as well as a lawsuit alleging racial discrimination.

Sallie Mae said the preferred securities will buy shares at anywhere between current market levels and a 22 percent premium to current levels, if the securities are converted on Dec. 15, 2010.

The underwriters for the deal have the option to buy up to 15.27 million shares and up to $150 million of convertible preferred stock.

UBS and Citigroup led the offering.