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Levering Up: What The Sallie Mae Deal Tells Us About The Financial Sector

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The deal announced this morning to take Sallie Mae private could point to a new era of leveraged buyouts in a segment of the market long-considered off-limits to the buyout rush—the financial services sector. One of the strongest objections to proposed private equity takeovers in the financial sector has been skepticism that it would be possible to borrow enough money to finance a takeout of an already highly-levered financial company. But student loan lender Sallie Mae supports a tremendous amount of debt, and yet the deal announced today includes a plan to layer on even more debt.
“The company has about $116.14 billion of total assets, supported by $4.4 billion of stockholders' equity, making it a highly leveraged entity already,” Reuters reporter Dan Wilchins noted on Friday. “Some corporate bond investors questioned how a leveraged buyout of Sallie Mae would work.”
The dealmakers who put together the Salle Mae buyout, however, have apparently found a way to work. In addition to two large private equity firms, JP Morgan Chase and Bank of America are taking large equity stakes in Sallie Mae. Both banks have apparently committed to providing financing for the transaction, as well as ongoing liquidity to finance the companies operations.
We may be looking a whole new era of private equity deals in the financial services sector. Last week we reported that financial writer Felix Salmon was proposing a private equity take-out of Goldman Sachs. Many readers objected that it would be impossible to finance a leveraged buyout of Goldman Sachs because the company is already so highly levered, an opinion that was widely shared on Wall Street. This morning’s Sallie Mae deal may mark a change in that thinking.

Negotiators Say Sallie Mae to Be Sold for $25 Billion
[New York Times]
Investor group to buy Sallie Mae for $25 Billion [Press Release from Sallie Mae]