Sallie Shares Plunge After CEO Talks By ALAN ZIBEL 12.19.07, 1:59 PM ET
SLM 23.52 - 5.35
WASHINGTON - Shares of Sallie Mae plunged to a five-year low Wednesday after the student lender's CEO said a dividend cut may be needed to bolster finances crimped by rising loan defaults and borrowing costs.
In the wake of a failed $25 billion buyout and a reduced profit forecast for 2008, Sallie Chairman and CEO Albert L. Lord tried to calm investors during a conference call. But analysts expressed dissatisfaction with Lord's answers, or lack of them, to their questions.
A group of investors led by private-equity firm J.C. Flowers & Co. reneged on its offer to buy Sallie - and brushed off Sallie's attempt to revive the transaction at a lower price - in part because of a new law that reduces federal subsidies on student loans.
Last week, Sallie, formally known as SLM Corp., slashed its profit forecast by more than 13 percent, blaming the revised subsidy law and the need to hold onto more cash to offset bad student loans.
Shares of Reston, Va.-based Sallie fell $5.63, or 19 percent, to $23.24, far below the $60-per-share offer made in April by the Flowers group.
Despite the company's financial weakness and falling stock price, Lord said Wednesday that the company would consider using shares to buy out smaller players in the student lending industry.
"This is a very challenging time," he said. "The goal here is to get out of deal mode, and into the growth mode."
Lord said the company plans to "look at the dividend in the second half of the year," as it seeks to boost its financial cushion.
Analysts voiced frustration with what they considered to be a lack of details from Lord, especially about the company's ability to package student loans into investments. The market for all kinds of risky debt has plummeted as defaults on home loans, credit-card debt, auto loans and student loans have risen.
"We're trying to figure out what your stock is going to be worth and you've got to give us some guidance," one analyst said during the conference call. "You've got to give some numbers."
Friedman, Billings, Ramsey & Co. analyst Matt Snowling told clients a research note after the call that "Rather than providing the reassurance and details investors were looking for...(Sallie Mae's) management created more uncertainty."
Snowling, who downgraded the company's shares to "market perform" also lowered his 12-month price target for the stock by $12 per share to $26 per share.
Lord acknowledged investors' displeasure at the start of the call.
"I'm quite aware that on the back end of a failed transaction that there are a lot of unhappy people," said Lord, who gained control of the company in a 1995 proxy contest. "(It's) ironic, because it was originally unhappy shareholders who originally put me in this seat in the first place."
Lord, who assumed the chief executive's seat on Friday and said he plans to stay in the position for at least two years, called his sale of more than 1.2 million shares of company stock to meet margin calls "embarrassing and troublesome to me personally" but not a reflection of diminished confidence in the company's long-term future.
He also pledged to improve the company's credit ratings, which were lowered earlier this year on concerns that buyout would lead the company would take on more debt. Standard & Poor's rates the company's debt 'BBB+,' the third-lowest investment-grade rating.
The failed buyout has landed in court, where Sallie is arguing that the investor group should have to pay a $900 million breakup fee. A trial could start late next year in Delaware Chancery Court.
The flagging financial outlook for the company, which lost $344 million in the third quarter, could bolster the investor group's legal argument - namely, that it shouldn't have to pay a fee for abandoning the deal because of significant changes in economic and regulatory conditions affecting Sallie.
A landmark student-loan law that took effect Oct. 1 cut billions of dollars in federal subsidies for student lenders like Sallie. And defaults are mounting on student loans, while credit-market tremors similar to those linked to the mortgage crisis have begun to show up in the $85 billion student-loan market.
Lord promised more details at an investor meeting in New York in mid-January. However, after numerous aggressive questions, Lord said analysts will "be going through a metal detector" before that meeting.
A company spokesman said that remark was intended as a joke.
Steven Davidoff, a law professor at Wayne State University who has followed the Sallie takeover battle closely, said "it's a bit odd for Lord to go on the stand and not have the information that he knows people are going to ask. He might have been better off just staying home."
MBIA unveils plans to protect ratings January 09, 2008: 03:22 PM EST
Jan. 9, 2008 (Thomson Financial delivered by Newstex) --
NEW YORK (AP) - MBIA Inc. plans to book more than $4 billion in losses, slash its dividend and sell $1 billion in bonds as part of a strategy unveiled Wednesday to shelter the bond insurer's crucial financial strength rating.
But analysts said investors doubted all of the bad news was out, and the shares fell sharply.
The Armonk, N.Y.-based insurer, under pressure from the ratings agencies to prove it has enough cash to pay potential insurance claims, will cut its quarterly dividend to 13 cents from 34 cents, saving an estimated $80 million a year. MBIA writes insurance policies that promise to reimburse bondholders when borrowers default.
The company will also sell $1 billion in bonds, and buy reinsurance to free up $50 million to $150 million of the company's cash.
Combined with a $1 billion investment from Warburg Pincus, MBIA said it believes these moves will mollify the major ratings agencies, allowing the company to maintain its 'AAA' financial strength ratings.
MBIA expects to reserve $737 million to pay claims for the fourth quarter, mainly because of anticipated losses on insured bonds backed by home equity lines of credit.
The company also said the market value of its portfolio of 'credit derivatives' -- or contracts protecting debt -- plunged $3.3 billion in the fourth quarter.
The dent in MBIA's credit derivatives portfolio is much higher than expected, Banc of America Securities analyst Tamara K. Kravec wrote in a client note. MBIA said the $3.3 billion in losses are only on paper; the company expects something like $200 million in actual losses on the portfolio.
Fitch Ratings, which on Dec. 20 gave MBIA six weeks to raise $1 billion or face a downgrade, said the planned $1 billion bond sale will be enough to protect the company's 'AAA' rating. The bonds are subordinated to all the company's other debt -- meaning if it becomes insolvent the bonds would not be repaid until the company paid off all other debt and claims.
Top-caliber ratings from the ratings agencies, which judge how likely MBIA is to cover all its insurance claims, are critical for a bond insurer. A downgrade from any of the major agencies would make it difficult for the company to win new business.
William Blair & Co. analyst Mark Lane said that while MBIA appears likely to sidestep a downgrade for now, people are still worried about what could be around the next bend.
'There's really no bottom in sight,' he said. 'People are thinking, 'Is another round going to happen in the next six to nine months?' The answer to that is, 'Who knows?'' Bond insurance has been one of the hardest-hit industries during the subprime mortgage crisis. Shares of MBIA, Ambac Financial Group Inc. (NYSE:AKT) (NYSE:AKF) (NYSE:ABK) , Security Capital Assurance Ltd. (NYSE:SCA) and ACA Capital Holdings Inc. (OOTC:ACAH) have all lost at least 75 percent of their value in the past year.
Seeking to capitalize on the disruption in the industry, Warren Buffett's Berkshire Hathaway Inc. (OOTC:HWYI) (NYSE:BRK A) established a bond insurer late last year to insure municipal bonds. The insurer at first will be capitalized with $105 million, which according to a Friedman Billings Ramsey report will enable the company to write $16 billion in business.
By comparison, Ambac and MBIA together insure $700 billion in municipal bonds, according to Friedman Billings Ramsey.
MBIA also said Wednesday that federal regulators have been probing how thoroughly the insurer disclosed the risks it faced.
In a filing with the Securities and Exchange Commission, MBIA said it furnished the SEC and the New York Insurance Department with information tied to the Warburg Pincus investment, as well as a disclosure to investors dated Dec. 10.
A deputy superintendent for the New York Insurance Department said it wanted to make sure the Warburg Pincus investment was still intact. The department is not investigating MBIA, he said. A spokesman for the SEC said the agency had no comment.
MBIA shares fell 5.9 percent to $13.16. At one point on the day the stock reached $11.11, its lowest trade since 1991.
UBS, Citigroup, Merrill Seen Exposed Heavily To Bond Insurers
January 18, 2008: 02:09 PM EST
NEW YORK -(Dow Jones)- Merrill Lynch & Co. (MER) on Thursday opened the door a crack on how seriously banks may be exposed to the spiraling decline of companies that insure bonds and complex structured securities, such as collateralized debt obligations.
As part of $16.7 billion of write-downs it took in the fourth quarter, $3.1 billion represented losses (or reserves for expected losses) on insurance contracts Merrill purchased to hedge its highest-rated CDO holdings. It set aside $1.9 billion alone for contracts insured by ACA Capital Holdings' (ACAH) ACA Financial Guaranty Corp., the most troubled of the so-called monoline bond insurers. Merrill in essence said the ACA "credit enhancement" was worthless.
Using Merrill as a rough model, Oppenheimer analyst Meredith Whitney says the top 10 bank underwriters of collateralized debt obligations last year may have to write off $10.1 billion of the $12.7 billion of their bonds insured by ACA. And that estimate is based on her assumption that the insurance is worth 20 cents on the dollar - above the level of Merrill's reserve.
At the top of the list is UBS AG (UBS), which was the biggest underwriter of asset-backed CDOs in last year's third quarter when ACA was most active issuing CDO insurance. UBS will have to write down $1.4 billion of its ACA-backed hedges, Whitney estimates. It is followed by Citigroup Inc. (C) - the biggest CDO underwriter in last year's second quarter - with an estimated $1.398 billion of losses, and Merrill, according to Whitney.
Representatives for Merrill and Citigroup declined to comment, and UBS did not immediately respond to requests for comment.
ACA likely sold protection on about 7% of all asset-backed CDO insurance sold in 2007, Whitney estimated, and on 32% in the third quarter when UBS was most active.
CDOs are packages of bonds that generate interest from payments on mortgages and auto, credit-card and other consumer loans.
Canadian Imperial Bank of Commerce (CM) in December questioned ACA's status as a "viable counterparty" after Standard & Poor's cut ACA Financial Guaranty's ratings to triple-C from A. CIBC said it will likely take a big charge for its ACA exposure in its first quarter that ends later this month.
What bothers investors, however, is that neither the bond insurers nor the banks that bought the so-called credit enhancement are giving details. And when banks do give details of their exposure to risky subprime mortgages and CDOs, they do so on a net basis that assumes they have effectively hedged assets that are often illiquid and notoriously difficult to value.
"There is literally no disclosure and therefore no way for us to know who ACA's actual counterparties are," Whitney said in a note to clients.
The problems aren't limited to ACA, which is partially owned by a unit of Bear Stearns Cos. (BSC), although its credit backing is lower than its competitors and it is the only monoline insurer that has to put up collateral for its own financing.
Shares of larger monoline insurers Ambac Financial Group Inc. (ABK) and MBIA Inc. (MBI) are tumbling as the triple-A credit ratings that are the backbone of their guarantees are in danger of downgrades. Ambac shares have fallen about 70% this week, and MBI's are down about 51%.
Radian Group (RDN), another large insurer, is off 34%. PMI Group (PMI), which has a big stake in bond insurer FGIC Corp., is off 30%. Shares of ACA have lost 97% of their value over the past 52 weeks, including a 16% drop since last Friday.
Ambac said earlier Friday that it has scrapped a plan announced Wednesday to raise $1 billion in capital, blaming soured market conditions. Investors sneered at the dilutive plan, which Ambac announced after Moody's Investors Service warned of a downgrade.
Moody's on Thursday placed ratings of MBIA and its insurance affiliates on review for possible downgrade. MBIA on Friday expressed "surprise" at Moody's action, saying that it continues to work toward stabilizing its capital strength.
Merrill's posse of bond guarantors, to be sure, includes some strong insurers - among them a unit of insurance monolith American International Group Inc. ( AIG). The company has bought credit enhancement from more than 15 insurers, according to a person close to Merrill, and it also has hedged some of its exposure by buying credit default swaps against the insurers.
But that is cold comfort to many analysts. Merrill was able to cut its exposure to CDOs from more than $40 billion six months ago to $4.8 billion at the end of December. But that represents "net" exposure, inclusive of hedges that may prove ineffective in part because they are based on bond insurance.
"Given ... that most of these hedges use financial guarantors (some of which are facing credit downgrades) as counterparties, we remain very uncomfortable with MER's CDO balance sheet exposure," Sanford C. Bernstein analyst Brad Hintz wrote in a note to clients Friday. Merrill's gross exposure to CDO assets is $ 30.4 billion, he said.
The immediate effect of a downgrade to a monoline insurer is that the value of the protection it sold also declines, and must be marked to fair value on banks' books. That's precisely the process that has led banks in recent weeks to take billions of dollars of write-downs and losses, as they revalue their moribund portfolios of subprime mortgages and related assets.
If the insurers fail, they would not technically be bankrupt, but instead go into "runoff," meaning that some buyers of their contracts might be made good on some of their exposure after much negotiation, said a banker familiar with the process.
While banks' exposure to bond insurers is only a small part of their broad credit problems, they can't be happy about the outlook for the insurers. "We believe management teams and the rating agencies have been underestimating how bad losses will be, so we expect that it will be necessary for the mortgage insurers to raise capital," Lehman Brothers mortgage analyst Bruce Harting told clients in a note Friday.
Indeed, Merrill Lynch is working with several other investment and commercial banks on a plan to help ACA forestall bankruptcy by giving it more time to unwind some of its $60 billion of insurance contracts, said a person familiar with negotiations.
Bond insurers got into the CDO market relatively recently. They were founded, and continue to do the bulk of their volume, insuring municipal bonds. This presents less of a direct credit risk to the banks, but it could expose them to lawsuits from clients who buy municipal bonds that were sold as guaranteed by the insurers.
That partly explains why New York state Insurance Commissioner Eric Dinallo has been seeking new infusions of capital for the bond insurance market. A unit of Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) conglomerate recently began insuring municipal bonds at Dinallo's request, according to a published report.
Merrill Chief Executive John Thain on Thursday let employees know just how concerned he is about the bond insurers. "We should all be helping and hoping that MBIA and the others get recapitalized," he told employees after the brokerage giant announced a $9.8 billion fourth-quarter loss. "ACA is the most difficult one."
Below is a list of the 10 banks with the biggest exposures to ACA, according to estimates from Oppenheimer's Whitney. They are based on her assumption that the carrying values of the insurance contract will be marked down to 20% of their value. However, she cautions that the bonds being insured have widely varying credit quality, ranging from zero value for CDO squared assets (CDOs issued on other CDOs) to 70 cents on the dollar for high-grade assets.
BANK EXPOSURE TO ACA (IN $ BILLIONS) Potential Markdown Bank Est. Exposure @80% Discount UBS $1.76 $1.41 Citigroup $1.75 $1.39 Merrill Lynch $1.65 $1.33 Wachovia $0.854 $0.68 Morgan Stanley $0.736 $0.59 Lehman Brothers $0.734 $0.59 Bank of America $0.574 $0.46 Goldman Sachs $0.550 $0.44 Deutsche Bank $0.310 $0.25 Royal Bk Scotland $0.340 $0.27 Source: Oppenheimer, Dealogic
-By Jed Horowitz, Dow Jones Newswires; 201-938-4047
(END) Dow Jones Newswires 01-18-08 1409ET Copyright (c) 2008 Dow Jones & Company, Inc.
NEW YORK, Jan 22 (Reuters) - Bond insurer Ambac Financial Group Inc on Tuesday reported a quarterly loss of $3.3 billion after recording massive credit derivative write-downs and setting aside more money for credit losses.
The $3.3 billion loss comes as the company faces serious questions about its future profitability. Ambac, the second-largest bond insurer in the world, lost a crucial top credit rating from Fitch for its main insurance unit on Friday. The company also scrapped plans to raise $1 billion of capital, citing market conditions.
More ratings cuts may be on the horizon for Ambac's main units. Moody's Investors Service and Standard & Poor's are also considering cutting Ambac Assurance Corp's top debt ratings. The bond insurer's difficulties have come after Ambac used credit derivatives to guarantee a series of portfolios of asset-backed securities. Those securities were linked to subprime mortgages, and have weakened dramatically in the widening credit crisis.
Ambac said in its earnings statement on Tuesday that it hopes to regain its top rating from Fitch, and is looking at strategic alternatives from "a number of potential parties."
Ambac wrote down $5.2 billion of credit derivatives, and set aside $208.5 million for losses.
On a per-share basis, Ambac's fourth-quarter loss was $31.85. In the year ago quarter it earned $202.7 million, or $1.88 a share. (Reporting by Dan Wilchins and Christian Plumb; editing by John Wallace and Dave Zimmerman)
Asian stocks swept up in global selloff as US recession fears mount UPDATE2 January 22, 2008: 01:39 AM EST
SINGAPORE, Jan. 22, 2008 (Thomson Financial delivered by Newstex) -- Asian stocks tumbled for a second straight session Tuesday, swept up in the global selloff sparked by worry that the US is headed for a recession that will dent export markets across the world.
With the US closed Monday for the Martin Luther King holiday, Asian markets took their cue from Europe and Latin America -- benchmarks in France, Germany and Brazil plunged about 7 percent overnight, their worst declines since just after the terror attacks of Sept 11, 2001.
'There is a growing fear out there that the slowdown in the US is now spreading to other parts of the world,' said Howard Gorges, vice chairman at South China Securities. 'Sentiment on the global economy and stock markets has suddenly become panicky.'
The Hang Seng plunged 8 percent to 21,904.
'That's it -- buyers have been defeated. They have finally run out of money and brokers are now making margin calls,' said Andrew Clarke, trader with SG Securities.
The S&P/ASX 200 was down 7.1 percent at 5,186.8 and the All Ordinaries lost 7.3 percent to 5,222, their worst performance since October 1997.
The Australian market has fallen for twelve straight sessions.
'It's hard to describe it as anything else but complete carnage,' said Justin Gallagher, head of sales trading at ABN Amro. (NYSE:ABN)
The Nikkei was last down 4.9 percent at 12,672, trading below 13,000 for the first time since October 2005.
The South Korean Kospi was down 4.5 percent at 1,608.56, the Shanghai Composite lost 5.5 percent to 4,644 and the Taiwanese Taiex was down 6.5 percent to 7,581.96.
The Philippines Composite was down 5.5 percent at 2,978 and the Singapore Straits Times lost 4.8 percent to 2,776.37, a level last seen in December 2006.
The Jakarta Composite fell 9.1 percent at 2,259.65.
'If, during the bull market last year, almost all stocks were worth buying, now everything is a 'sell',' said Cece Ridwanulloh, a fund manager at Ekokapital Sekuritas in Jakarta.
Global markets slumped Monday as investors concluded that the 145 billion-dollar stimulus package unveiled by President Bush on Monday comes too late to stop the world's biggest economy from sliding into recession.
Investors are increasingly nervous about the financial sector following massive writedowns by the big US investment banks in the fourth quarter.
'Unless the US government decides to inject public funds into resolving the subprime loan issue, fears about the credit crunch may not go away,' said Osamu Tamada, a Mizuho Investors Securities strategist.
US poised for losses The US market is expected to fall hard when it resumes trade later today. Futures on the Dow Jones Industrial Average were last quoted down 516 points, while S&P futures were down 66 points, signalling heavy selling at the open.
Investors are not just nervous about the likelihood of a US recession. They are also worried that banks around the world are facing another round of writedowns on securities related to the US subprime sector.
On Monday, German state-owned bank WestLB said it expects a pretax loss of about 1 billion euros for 2007, mostly due to 1 billion euros in subprime-related writedowns.
Other German banks, including SachsenLB and Landesbank Baden-Wuerttemberg, have had to make painful adjustments because of their exposure to the subprime meltdown.
Elsewhere in Europe, UBS (NYSE:UBS) , Barclays (NYSE:BCS) and Royal Bank of Scotland have also recorded billions of dollars in writedowns.
Speculation is growing that some of France's big banks are poised to announce writedowns.
Societe Generale shares tumbled Monday on talk that it has bigger exposure to the troubled sector than previously understood.
SocGen shares fell 8 percent, extending an 8.6 percent loss from Friday, while BNP Paribas (OOTC:BPRBF) lost 9.6 percent.
Even more ominous is the precarious outlook for the big US bond insurers after Fitch downgraded Ambac last week after it scrapped a plan to raise capital.
Analysts are expecting other ratings agencies to follow suit, a move which would mean the bonds guaranteed by Ambac will also be downgraded -- forcing the holders of those bonds to write down their value.
The seven Triple-A-rated bond insurers back about 2.4 trillion dollars of debt, 'so it's easy to see the scale of the problem we all face if this house of cards is allowed to collapse,' said analysts at Deutsche Bank. (NYSE:DB)
'The risks are so serious that one has to believe that negotiations to avoid it are currently going on behind closed doors,' they said in emailed comments.
Fear factor 'The market is being driven by fear right now and the current fear is of a major insolvency in the US,' said Andrew Pease, an investment strategist at Russell Investment Group in Sydney.
'It will be interesting how the US market opens up tonight but what's more important is how it finishes - a lot now depends on the Fed (US Federal Reserve) because that's the one organisation that can break the current catalyst for change.' The Federal Open Market Committee meets on Jan 30 with some market commentators expecting it to decide on a federal funds target rate cut of as much as 75 percentage points.
Pease said markets panic at times even though market fundamentals remain sound with forward price earnings multiples very low, even taking into account the possibility of a 20 percent downgrade in current estimates.
'Our advice to our investors is just to sit tight and focus on longer-term fundamentals and don't panic,' he said.
'We know that markets move through waves of fear and greed every now and then and right now there's as much fear as there's ever been.'
Asian stock markets have fallen hard in 2008 so far.
The Nikkei has lost 17.5 percent, extending the 11 percent decline suffered in 2007. The Indian Sensex is down 22 percent, the Philippines down 18 percent and the Kospi off 16 percent.
Even the Shanghai Composite, the market darling for the last two years, is down 12 percent so far.
Financials battered Against this background, financial stocks slumped across Asia. Bank of China, which has the biggest subprime exposure among Chinese lenders, lost 8.6 percent to 3.08 Hong Kong dollars.
China's biggest bank Industrial and Commercial Bank of China (OOTC:IDCBF) fell 11.1 percent to 4.32 dollars.
HSBC Holdings shed 6.3 percent at 106.40 dollars.
Ping An Insurance Group extended its fall, down 11.8 percent to 60 dollars, as investors feared its plan to sell new shares and bonds worth about 160 billion yuan may dilute earnings.
In Australia, ANZ Bank lost 3.4 percent to 25.33 Australian dollars and Commonwealth Bank lost 3.3 percent to 49.13. National Australia Bank (OOTC:NABZY) fell 4.9 percent to 33.47.
In Tokyo, Mizuho Financial Group (NYSE:MFG) was down 5.4 percent at 439,000 yen, Mitsubishi UFJ Financial down 2.4 percent at 893, and Sumitomo Mitsui Finanical Group down 4.1 percent at 728,000. Japan's biggest stock broker Nomura Holdings (NYSE:NMR) was down 3.9 percent at 1,415.
Exporters were hurt by the strong yen. Sony (NYSE:SNE) declined 5.1 percent to 5,210, printer maker Canon shed 4.3 percent at 4,250, construction machinery maker Komatsu slipped 6.9 percent to 2,235 and Toyota Motor (NYSE:TM) was down 290 yen or 5.5 percent at 4,970.
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