Goldman Invests in First Marblehead

Shares of troubled student loan buyer First Marblehead(FMD) surged Friday after a much-needed $260.5 million investment from Goldman Sachs'(GS) private equity arm as the lender battles mounting balance sheet problems.

GS Capital Partners' stake will equal 19.99% of shares outstanding at the close of the transaction. Goldman also will offer First Marblehead a $1 billion warehouse facility to address the company's capital needs.

First Marblehead also said it would eliminate payment of its quarterly dividend "for the foreseeable future," after paying its next one scheduled for Dec. 21. The company on Dec. 7 slashed its dividend to 12 cents a share from 27.5 cents and suspended securitization of student loans, citing "uneconomic terms in the current capital markets."

GS Capital will invest $59.8 million to acquire securities convertible to 5.3 million shares of common stock at $11.24 a share. After it receives regulatory clearance, it will invest up to another $200.7 million to acquire additional securities convertible to up to 13.4 million shares at a conversion price of $15 a share.

"Goldman Sachs' investment and financing provides our Company with additional capital resources to fund our long-term strategy. In the current market, we plan to continue to focus on prudent credit underwriting," First Marblehead CEO Jack Kopinsky said in a statement. "We believe this will allow us to provide the greatest value to our shareholders, our clients, students and their parents, and to our employees."

The convertible shares will be non-voting. GS Capital will not hold more than 9.9% of the company's voting shares at any time. The firm also will have the right to name a member of the company's board.

Shares of student lender Sallie Mae(SLM) plunged on Wednesday, after CEO Albert Lord suggested it too could cut its dividend amid rising loan defaults.

First Marblehead shares surged more than 55% Friday morning on the news. More recently, the stock was up 37.8% to $15.49.

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