SLM DOWNGRADED TO Ba1 FROM Baa2, OUTLOOK NEGATIVE



SLM DOWNGRADED TO Ba1 FROM Baa2, OUTLOOK NEGATIVE

PRESS RELEASE

New York, May 13, 2009 -- Moody's Investors Service downgraded the long-term and short-term ratings of SLM Corp. (senior unsecured to Ba1 from Baa2, short-term to Not Prime from Prime-2) and assigned a negative outlook. The rating action concludes the review for possible downgrade initiated on February 27, 2009.

Today's rating action reflects Moody's concerns regarding SLM's earnings and cash flow generation capacity as the company transitions to a post-FFELP lending environment, continued uncertainties facing the company related to the political and consumer lending environment, and its liquidity and funding position. This combination of circumstances is not consistent with an investment grade ratings profile, in Moody's view.

President Obama's budget proposal, if adopted, would end the FFELP lending program effective July 1, 2010. As a result, SLM's traditional role as a lender and servicer in the federal student loan program would change to one of originator and servicer, in competition with other prospective vendors. This new business model has implications for SLM's future profitability and cash flows because profit contribution from the servicing business is less than that from the current ECASLA model, and is likely to remain so as profits from servicing loans for the US government are likely to be heavily scrutinized. Also challenging the firm's profitability prospects are an ongoing dislocation of the CP/LIBOR spread, which affects the firm's yield on earning assets, and continuing asset quality challenges in SLM's private education loan portfolio. Cash flow generation is taking on increasing importance in SLM's credit profile because the firm's debt balance exceeds its unencumbered loans, and refinancing in the unsecured debt markets is unreliable. Therefore, SLM will need to generate profits and cash flow in order to service and ultimately repay some of its debt, as opposed to generating the required cash through asset liquidation.

SLM has put forward a counter-proposal to the President's plan, calling for the choice of vendors to rest with the schools rather than the government, and for vendors to be given incentives for default aversion via risk sharing. However, the counter-proposal faces considerable uncertainty, given the strong support of the Administration's original proposal. Moody's is also concerned that the private education lending business could come under regulatory and legislative scrutiny, which could result in greater restrictions and lower returns from this business line.

Regarding liquidity and funding, SLM faces an asset-liability mismatch, particularly over the next several years, as scheduled term unsecured debt maturities exceed collections on unencumbered loans and other internally generated sources. As noted above,SLM does hold a significant balance of unencumbered assets that it may monetize in order to meet coming maturities. However, the company continues to face a difficult environment for capital markets-sourced term funding. Pricing in the term ABS market -- even for government guaranteed loans -- remains at relatively wide levels; and the unsecured market remains unavailable to the company given current trading levels. There have been some positive recent developments, including the extension of the company's ABCP facility and the closing of the Department of Education's Straight A Funding conduit facility, which reduces the firm's near-term liquidity risks. But Moody's is concerned that constrained capital markets conditions, if sustained, could challenge the company's financial flexibility and debt service capability in the intermediate future.

Balancing these concerns, SLM possesses a strong franchise in the student loan industry, with industry leading scale, operating efficiency in originations and servicing, and longstanding relationships with colleges and universities. This positions the company well to gain a significant share of originations and servicing business and to maintain access to schools for its private education lending business. SLM's ratings also incorporate its improved corporate governance as reflected in a strengthened senior management team, board, and corporate commitment to risk management; and improved operating efficiencies via its ongoing expense reduction program.

The negative outlook on the company's long-term ratings reflects the continuing challenges associated with business transition issues and funding uncertainties that could place further pressure on the firm's ratings over the next several quarters. In order to return to a stable outlook, Moody's would need to observe progress in SLM's transition of its government student loan business to an origination and servicing model from a lending-based model, as evidenced by the achievement of a significant role in the post-FFELP student loan era while achieving acceptable profitability and cash flow generation. Moody's would also need to observe further improvement in the company's funding profile, including re-establishing reliable access to the term debt markets to fund private loan originations and generating liquidity to meet unsecured debt maturities. A stable outlook would also require a reduction in SLM's asset quality volatility in the private education loan business, demonstrated by lower delinquencies, credit losses, and provisioning requirements.

A negative rating action could be precipitated by a disruption or weakening of SLM's liquidity and funding profile; and/or additional degradation of asset quality and core profitability.

The following ratings of SLM Corp. were downgraded:

Senior unsecured debt -- to Ba1 from Baa2

Subordinate shelf -- to (P) Ba2 from (P) Baa3

Preferred stock -- to Ba3 from Ba1

Short-term debt -- to Not Prime from Prime-2

The last rating action on SLM was on February 27, 2009 when Moody's placed the company's ratings on review for possible downgrade.

The principal methodology used in rating SLM was Moody's Analyzing The Credit Risks Of Finance Companies, which can be found at in the Credit Policy & Methodologies directory, in the Rating Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Headquartered in Reston, VA, SLM is the nation's leading provider of saving- and paying-for-college programs. The company manages approximately $185 billion in education loans and serves 10 million student and parent customers.

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