SOURCE: J.C. Flowers & Co. LLC

October 09, 2007 16:50 ET

Investor Group Revised Proposal Expires

NEW YORK, NY--(Marketwire - October 9, 2007) - J.C. Flowers & Co., on behalf of itself and its partners Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), and Friedman Fleischer and Lowe, made the following statement concerning SLM Corporation (NYSE: SLM), commonly known as Sallie Mae:

"We regret that our offer to amend the terms of the Sallie Mae transaction was allowed to expire without discussion. Instead, Sallie Mae filed what we firmly believe is a meritless lawsuit. We now look forward to having this matter resolved in the Delaware Chancery Court."

Below is a fact sheet describing the Material Adverse Effect on Sallie Mae as defined in the Merger Agreement.

THERE HAS BEEN A MAE IN SALLIE MAE'S BUSINESS

--  The definition of MAE in the merger agreement was specifically
    tailored to provide that the full impact of "any" legislation "more
    adverse" to Sallie Mae than the Bush Budget Proposal counts in deciding
    whether there has been a MAE.  The contract was drafted this way because we
    were not willing to accept the risk that legislation "more adverse" to the
    company than the Bush Budget Proposal would be enacted.
--  Sallie Mae's claim that there has not been a MAE rests on a misreading
    of the contract.  The contract does not say that the legislation must be
    "materially" more adverse, only "more adverse," than the legislation
    described in Sallie Mae's 10-K.
--  According to the Congressional Budget Office, the College Cost
    Reduction and Access Act will cut subsidies to the student loan industry by
    $22.3 billion; the Bush Budget Proposal would have cut subsidies by $15.5
    billion.  The new legislation therefore is not only "more adverse" to
    Sallie Mae than the Bush Budget Proposal, it is 45% "more adverse."  Thus,
    under the definition, the new legislation has a MAE on Sallie Mae's
    business.
--  Sallie Mae's claim that there has not been a MAE also rests upon newly-
    created assumptions that are not realistic.  Those assumptions fail to
    reflect fully the impact of the new legislation on Sallie Mae's business
    and assume that credit markets will be even better than they had assumed
    before the credit crunch began.
--  The MAE is compounded by the dramatic changes in credit markets,
    changes that have a disproportionate impact on Sallie Mae, a company that
    has to raise tens of billions in the wholesale credit markets every year to
    fund its operations.
--  We estimate that the combined impact of the credit crunch and the new
    legislation will reduce Sallie Mae's core earnings net income by 14.4% in
    2009, with the reduction growing to 20.1% in 2012, as compared to the
    financing and legislative assumptions provided to us by Sallie Mae
    management at the time the deal was struck.  That is material.
    

THE COMPANY'S INTERPRETATION OF THE MAE DEFINITION IS WRONG

Sallie Mae's interpretation of the MAE definition rests upon a fundamental misinterpretation of the contract.

--  This deal was negotiated with the knowledge that there were two
    existing legislative and budget proposals, H.R. 5 and the Bush Budget
    Proposal that if enacted, would have a materially adverse effect on Sallie
    Mae.  Sallie Mae's management provided base case projections that assumed
    that the legislative outcome would be at the midpoint between the Bush
    Budget Proposal and H.R. 5.
--  Because of this, the MAE definition is not just "off the shelf."  It
    was specifically crafted to take account of the fact that while we were
    willing to accept the risk that the Bush Budget Proposal would be enacted,
    we were not willing to accept the risk that legislation "more adverse" to
    the company than the Bush Budget Proposal would be enacted.
--  That is why the MAE definition carves out the proposals described in
    Sallie Mae's 10-K, and then provides that we were not accepting the risk of
    "any changes in Applicable Law ... more adverse" to Sallie Mae than the
    proposals described in the 10-K.
--  The company claims that legislative changes that are "more adverse" to
    the company have to be "materially more adverse" to constitute a MAE.  The
    contract just does not say that.
--  A "change in Applicable Law" does not have to be "materially more
    adverse" to trigger a MAE.  The word "material" is not there.  "Any"
    legislative change "more adverse" to Sallie Mae than the already material
    legislative changes described in the 10-K counts.
--  Near the end of our negotiations, Senator Kennedy made a proposal that
    called for subsidy cuts deeper than the cuts described in the 10-K.  The
    company asked us to accept the risk that the Kennedy proposal would become
    law.  We refused.  We drew the final line -- the maximum pain we were
    willing to take -- at the Bush Budget Proposal.
    

The Congressional Budget Office estimates that the subsidy cuts under the new Act will cost the student lending industry $22.3 billion, as compared to $15.5 billion of cuts under the Bush Budget Proposal. As the single largest player in the industry by a large margin, a very substantial portion of those cuts will impact Sallie Mae. The College Cost Reduction and Access Act is "more adverse" than the Bush Budget Proposal and constitutes a MAE even without giving effect to the changes in the credit markets.

WE BELIEVE THAT THE COMPANY'S RECENTLY REVISED PROJECTIONS ARE UNREALISTIC

Sallie Mae has stated that under its new projections -- put together after the College Cost Reduction and Access Act was finalized and after the credit crunch hit -- its core earnings net income would be reduced between 1.8% and 2.1% annually. Sallie Mae's projections purport to compare the Bush Budget Proposal to the legislation that was just enacted.

The premise of Sallie Mae's analysis is wrong: once Congress enacted a law "more adverse" than the Bush Budget Proposal, the MAE definition provides that the entire impact of that legislation must be considered. That was the deal. The definition also provides that materially adverse changes in credit conditions that "disproportionately affect the Company relative to similarly sized financial services companies" constitute an independent MAE.

Sallie Mae's analysis simply glosses over these facts and rests upon newly-created projections that are not realistic:

--  In assessing the impact of the new legislation, the most recent
    projections provided to us by the company assume that the company will be
    able to increase its market share very substantially in just two years.
    This assumption is not justified.  And Sallie Mae knows it:  a Sallie Mae
    executive acknowledged to us that this assumption might need to be scaled
    back.
--  If more realistic assumptions are used, we estimate that the new
    legislation alone will reduce core earnings net income by 10% in 2009,
    growing to 14.9% in 2012, when compared to the financing and legislative
    assumptions provided to us by Sallie Mae management at the time the deal
    was struck.
--  The company's newly-created projections assume that by year end 2007
    and continuing thereafter, credit markets will be even better than what the
    company had assumed before the credit crunch began.  We do not believe this
    is realistic either.
--  Sallie Mae is particularly vulnerable to changes in credit markets.
    The vast majority of Sallie Mae's funding needs must be met in the
    wholesale credit markets, tens of billions every year.  Unlike similarly
    sized financial services companies that take deposits, Sallie Mae relies
    almost exclusively on the wholesale credit markets to fund its operations.
--  If more realistic assumptions are used, we estimate that the combined
    impact of the legislation and credit crunch will reduce core earnings net
    income by 14.4% in 2009, growing to 20.1% in 2012, when compared to the
    financing and legislative assumptions provided to us by Sallie Mae
    management at the time the deal was struck.
    

The bottom line is that Sallie Mae has suffered a MAE as defined in the contract.

Contact Information

  • Media Contact:
    Stephanie Cutter
    (202) 528-0143
    Email Contact

    J.C. Flowers & Co. LLC
    717 Fifth Avenue, 26th Floor
    New York, New York 10022