Sallie Mae Protests Downgrading of Its Debt to Junk Status by Moody's

Moody’s Investors Service downgraded its ratings of Sallie Mae’s long- and short-term debt this week, citing among other things a concern that the company might lose money under President Obama’s plan to end the federal guaranteed-student-loan program.

Moody’s dropped its rating of the company’s senior unsecured debt into junk status, while lowering its rating of the company’s short-term debt from “prime-2,” which indicates a strong degree of confidence in the company’s ability to repay, to the less desirable “not prime.” The ratings agency also assigned a negative outlook to both classes of debt.

Sallie Mae quickly fired back with a news release calling the downgrade “unfortunate and surprising,” given that the lender’s liquidity has improved in recent weeks.

“Moody’s conclusion rests mostly on its predictions of the political process surrounding the federal student-loan program,” said Albert L. Lord, Sallie Mae’s CEO. “This seems to us inappropriately speculative and very premature since any changes made to America’s student-loan programs must be legislated by Congress — a several-months process not yet started.”

The education committee of the U.S. House of Representatives will hold its first hearing on the president’s proposal next week. Sallie Mae has urged lawmakers to consider a counterproposal that would preserve a role for banks and other private financial companies in the federal student-loan system, while doing away with the subsidies the government pays in the current guaranteed-lending program.

Lawmakers have said they will consider that alternative, but Moody’s said in a news release that the plan faces “considerable uncertainty, given the strong support of the administration’s original proposal.” —Kelly Field