SOURCE: J.C. Flowers & Co. LLC

October 02, 2007 14:39 ET

Investor Group Sends Revised Proposal to Sallie Mae

Offer Reflects New Economic and Legislative Environment

NEW YORK, NY--(Marketwire - October 2, 2007) - J.C. Flowers & Co., on behalf of itself and its partners JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Friedman Fleischer and Lowe, today sent a revised proposal to the Board of Directors of SLM Corporation (NYSE: SLM), commonly known as Sallie Mae, to buy the company at a price that appropriately and fairly reflects the new economic and legislative environment that faces the company.

In the revised proposal, the investor group offered:

--  Up to $60 per Sallie Mae share, composed of $50 in cash plus warrants
    with a payout of up to an additional $10 per share.
--  Based on the investor group's analysis, if Sallie Mae performs
    consistent with its own projections, the warrants could result in a payout
    of over $7 per share.  If the company exceeds its projections, the payout
    could reach the full $10 per share.
    

In the letter, J. Christopher Flowers said, "This revised proposal offers full and fair value to the Sallie Mae shareholders in light of the changes that have occurred since the signing of our agreement, and a significant premium to what the company's unaffected share price would likely be based on historical trading ranges and current market conditions."

Following are the proposal letter and the terms of the warrant. Also following is a fact sheet describing the Material Adverse Effect on Sallie Mae as defined in the original Merger Agreement.

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


                                                            October 2, 2007


Board of Directors
SLM Corporation
12061 Bluemont Way
Reston, Virginia  20190

Dear Directors:

As you are aware, we have sought to meet to discuss the controversy between our group and Sallie Mae and would welcome the opportunity to do so at any time. This letter sets forth our proposal to revise the agreement between Sallie Mae and Mustang Holding Company Inc.

We believe that, if the conditions to the closing of our transaction were required to be measured today, the conditions to our obligation to close would not be satisfied. Our analysis of this matter is set forth in detail in Exhibit A. We are aware that the time for measuring the conditions to closing is not yet at hand. Rather than waiting for that time to arrive, however, we believe that it is in the interest of both ourselves and Sallie Mae to eliminate any uncertainty in our pending transaction. Notwithstanding the substantial deterioration in the company's prospects, we are prepared to proceed on the basis outlined below.

We would propose a price of up to $60 per Sallie Mae share, composed of $50 in cash plus warrants with a payout of up to an additional $10 per share. Based on our analysis, if the company performs consistent with Sallie Mae's projections, the warrants could result in a payout of over $7 per share. If the company exceeds its projections, the payout could reach the full $10 per share. The proposed terms of the warrants are set forth in Exhibit B.

Additionally, if the FDIC does not approve this transaction on a timely basis, we would be willing to proceed to an alternative arrangement whereby Sallie Mae would be divested of its ILC. We also would be willing to consider amending the no-shop clause of the Merger Agreement.

Our proposal offers full and fair value to the Sallie Mae shareholders in light of the changes that have occurred since the signing of our agreement, and a significant premium to the company's likely unaffected share price based on historical trading ranges and current market conditions. It also includes an extraordinary level of funding for the Sallie Mae business, which provides substantial value to Sallie Mae shareholders who will now be participating directly in the success of the company through their ownership of the warrants.

This proposal to revise our agreement expires on October 9, 2007.

                                             Very truly yours,
                                             Christopher Flowers

Exhibit B

Summary of Warrant Indicative Terms

Issuer:              Mustang Holding Company Inc.

Security:            114 million Warrants to purchase common shares of the
                     Issuer (0.2694 Warrants per common share of SLM Corp.
                     purchased by the Equity Investors)

Exercisability:      Only on expiration date (European Style)

Maturity:            5 Years

Initial Stock Price: Approximately $15.95 per share ($50.00 per share
                     acquisition price of SLM Corp. less newly issued debt
                     per share of $34.05)

Exercise Price:      $32.00 per share (consistent with a 15% IRR to the
                     Equity Investors before additional value is delivered
                     to the Seller)

Cap:                 Maximum payout per warrant is $37.12 (equivalent to
                     $10 per SLM share).

Settlement:          Physical, net share or cash settlement at the option
                     of the IssuerIf the Issuer's common shares are not
                     listed for trading on a national securities exchange
                     on the expiration date, then there will be a valuation
                     mechanism for purposes of determining the effect of
                     the cap and settlement will be physical only

Anti-dilution
 Adjustments:       Standard adjustments for dividends, stock splits or
                    other dilutive events

Form of Offering:   SEC registered at time of acquisition

Subject to Final Documentation

Exhibit A

THERE HAS BEEN AN 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 an 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 an 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 an MAE on Sallie Mae's
    business.
    
--  Sallie Mae's claim that there has not been an 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 an MAE.  The
    contract just does not say that.
    
--  A "change in Applicable Law" does not have to be "materially more
    adverse" to trigger an 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 an 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 an MAE as defined in the contract.

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