Sallie Mae says credit facilities have shrunk

By Dan Wilchins

NEW YORK, Aug 28 (Reuters) - Sallie Mae said credit facilities that help fund its loans have shrunk, in a development that could reduce the largest student lender's capacity to make some types of educational loans.

Any decline in lending capacity may cut into the company's profitability, and ratings agency Moody's Investors Service said on Thursday that it may cut Sallie Mae's debt ratings, which are two steps above junk status.

The company has found it difficult to finance student loans, as borrowing in loan and bond markets has grown more expensive.

There are some rays of hope for Sallie Mae, most notably a law signed in May that temporarily allows the U.S. Department of Education to buy certain student loans and take other steps to support education finance. The company said earlier this month it had received initial funding under that program, and Sallie Mae said last month that its funding costs are improving.

On Thursday, Sallie Mae said a credit facility that supported secured short-term funding for private student loans declined to about $3.8 billion from about $5.9 billion. A separate credit facility supporting federal student loans declined by about $4.1 billion to $21.9 billion.

The company said it reduced these loan commitments after looking at its liquidity needs, and taking advantage of the Department of Education's financing program.

But Moody's said in a statement that it is looking at Sallie Mae's business and funding plans for both private student loans, where the lender bears the risk of the borrower defaulting, and government-guaranteed loans, where the government bears most of the risk.

"Private education loans are an increasingly important profit engine for the company, and a reduction in the ability to originate and fund these loans could be problematic," the rating agency said.

Curt Beaudouin, a Moody's analyst, told Reuters that Sallie Mae could have other ways of funding private student loans, such as borrowing in the corporate bond markets.

Moody's rates Sallie Mae, legally known as SLM Corp, at "Baa2," the second lowest investment-grade rating. (Reporting by Dan Wilchins, editing by Richard Chang)