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, who holds perhaps the most-recognized name in student lending as Sallie Mae, has been put on notice by three major ratings agencies. Moody's Investors Service, Standard & Poor's, and Fitch Ratings all warn that SLM could see a substantial downgrade in its investment-grade credit ratings if it finalizes its reported $25 billion sale to private investors.
A multitude of factors are weighing the lending giant's credit rating down. For one, it has a substantial debt burden, and regulatory limits exist to mandate how much debt the company can accrue in total – one reason why financial services aren't typically pegged for buyouts. Additionally, SLM's credit default swaps, which measure credit risk, doubled as bondholders reacted to Monday's confirmation of Friday's buyout whispers.
Finally, SLM still faces scrutiny from state and federal governments over business practices that sought to buy the endorsements of college financial aid officers. In addition to a $2 million settlement with New York Attorney General Andrew Cuomo, there is still an ongoing federal investigation spearheaded by Senator Ted Kennedy.
There are a few ways SLM can avoid the steep decline in its ratings. The buyers – a group that includes J.C. Flowers & Co., Friedman Fleischer & Lowe, Bank of America
, and JPMorgan Chase
– could lay out more cash upfront in order to help offset some of the company's debt. Alternatively, the company could turn to the securitization market for funding, instead of unsecured public debt markets.
SLM's merger is still subject to shareholder approval, and finalization is unlikely until at least the third quarter. The company has yet to comment on its looming junk status.