Sallie Mae LBO Bullish For Financial Sector

This LBO is a breakthrough for the financial sector and should help boost valuations. Until now, the theory was that the debt typically taken on in an LBO would be a deal breaker for many financial companies, which often have high debt levels to begin with and credit ratings to maintain. Additional debt from the leveraged buyout could bring downgrades of the credit rating and hurt a company’s ability to borrow.

However, the dealmakers in the Sallie Mae transaction came up with a solution...an alternative source of funding and the heavy backing of two big banks.

Under the plan, Sallie Mae could rely on the securitization of its student loans for most of its funding, and it also has a commitment of up to $200 billion from JP Morgan and Bank of America. That means any downgrade in the company's credit rating would not matter much.

A report from CreditSights analysts said the major lesson from the Sallie Mae deal was that LBO deals are now possible for financial companies that can rely on securitization, the selling of loans to investors. Firms can forgo investment grade ratings and rely mostly on securitization while having a large liquidity facility from banks as a backup plan.