Sallie Mae's stock, preferred sales raise $3 bln

By Dan Wilchins

NEW YORK (Reuters) - Sallie Mae (SLM.N: Quote, Profile, Research, Stock Buzz), the largest U.S. educational lending company, said it sold $1 billion of convertible securities and $2 billion of common stock, raising more money than it had expected to pay off bad derivatives bets.

Sallie Mae sold common stock at $19.65 a share, equal to the company's closing share price on Thursday. The common stock sale offering was increased from an originally planned $1.5 billion, signaling strong demand.

The mandatory convertible preferred securities will offer a dividend of 7.25 percent, until investors convert them into common stock, or until their mandatory conversion on December 15, 2010.

Sallie Mae, formally known as SLM Corp, said on Wednesday it was issuing $2.5 billion of convertible preferred securities and common shares, with about $2 billion of the proceeds going to pay off losses on derivatives known as equity forward contracts.

Sallie Mae used equity forwards as part of its share buyback plan for years. The contracts allowed the company to reduce the cost of buying back its shares as long as its stock price kept rising.

But if, as happened, Sallie Mae's share price fell far enough, the company had to buy back a large number of shares at above-market prices.

In this case, Sallie Mae will use about $2 billion from its offering to buy back about 44 million shares, now worth closer to $865 million at current market prices. The rest of the proceeds will be used for general corporate purposes.

Sallie Mae stock fell 11.2 percent to $19.65 on the New York Stock Exchange, their lowest closing level in about seven years.