Sallie Mae Won't Take Immediate Action On FFELP Portfolio

SLM Corp. (SLM) won't spin off its portfolio of federally guaranteed student loans in the near future, despite saying in June it would bring "significant structural changes," including a possible spinoff of the portfolio.

Rather, the nation's largest student lender will focus first on bringing its assets and liabilities into balance before addressing its $147 billion portfolio of Federal Family Education Loan Program, or FFELP, loans. The company, commonly known as Sallie Mae, said it would like to extend the maturity dates of its unsecured liabilities. It will continue to earn income from the loans as it faces $13.7 billion in debt maturities between 2011 and 2014.

"You're not going to see any dramatic balance sheet actions from the company, at least any time soon," Albert Lord, vice chairman and chief executive, said on a conference call with analysts.

Investors have been waiting for months for Sallie Mae to address its FFELP portfolio, as the company hinted it could spin it off, sell the equity interest to a hedge fund or keep the status quo. The company lost a major revenue source on July 1 when the government brought originations of federal loans in-house.

Sallie Mae had flirted with converting into a bank holding company, but the portfolio could have created a capital deficiency under certain bank holding guidelines. The company also feared its balance sheet structure could cause trouble in the face of a proposal that would levy fees on certain financial institutions, as Sallie Mae doesn't have the deposit base that other banks have. However, Lord said those regulatory and tax matters "seem less likely now."

Though Lord said at an investor conference in June he would like to hold on to the portfolio, "It's really yesterday's business and we need to move on," he said at the time.

Lord said Wednesday he sees the company's intrinsic value 50% to 70% above current market value, but said even selling the portfolio may not release that value.

Sallie Mae has been actively growing its FFELP portfolio in recent months, buying up the portfolios of competitors who aren't interested in holding federal loans without originating new ones. Last month, the company bought $28 billion in securitized federal loans from the nation's second largest federal lender, Student Loan Corp. (STU). Sallie Mae expects to book a 13 cent per-share gain in 2011 on that deal.

Meanwhile, Lord said Sallie Mae will continue cutting costs, aiming to hit a run rate below $1 billion per year by the end of 2012.

Sallie Mae expects to report operating expenses of $1.3 billion for the current year.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; [e-mail]