Sallie Looks to Raise $2.5 Billion

Student lender Sallie Mae(SLM) plans to raise $2.5 billion through the sale of convertible preferred and common stock, most of which will be used to honor ill-timed commitments to buy back its own shares.

Sallie will spend $2 billion of the proceeds to repurchase more than 44 million shares under its "equity forward purchase contract," through which the lender had committed to buy back shares a set price. The arrangement backfired as the company's shares slumped amid the ongoing credit slump.

The remainder of the proceeds will be used for general corporate purposes, the company said.

The capital raising comes on the heels of the company's announcement earlier this month that a $25 billion buyout bid by a group led by J.C. Flowers was dead. CEO Albert Lord also rattled investors in a conference call, indicating that Sallie Mae could cut its dividend next year, sending shares down nearly 20%.

Other lenders have also faced balance sheet pain amid the credit crisis, as student loan buyer First Marblehead(FMD) last week received an investment of up to $260.5 million from Goldman Sachs'(GS) private-equity arm.

UBS and Citigroup will serve as bookrunning managers for Sallie's upcoming offering. The lender will offer $1.5 billion of common stock and $1 billion of mandatory convertible preferred stock.

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