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Fitch downgrades SLM on plans to split into 2

NEW YORK (AP) -- Fitch Ratings is downgrading SLM Corp., the formal name of Sallie Mae, after the student loan giant announced that it plans to split into two separate, publicly traded companies.

Moody's also said Wednesday that it was putting SLM on review for a possible downgrade.

Earlier in the day Sallie Mae said that the two separate companies — an education loan management business and a consumer banking business — would help unlock value and boost its long-term growth potential.

The two separate companies will initially be owned by Sallie Mae stockholders, but the separation of the businesses does not require a shareholder vote.

Newark, Del.-based Sallie Mae anticipates the split, if given final approval by its board, could be completed within 12 months.

Fitch lowered SLM's issuer default ratings to "BB+/B" from "BBB-/F3." This resulted in a move to junk status from investment grade.

The ratings agency also put the company's ratings on watch for a potential further downgrade. Fitch said that if the final transaction is similar to what Sallie Mae disclosed Wednesday, it would probably downgrade SLM's ratings by one additional notch.

"At the time of the proposed split, 100 percent of SLM's assets are expected to be in run-off mode, leaving the servicing of federal student loans and other contingency collections as the primary sources of core earnings growth, both of which are believed to have relatively thin operating margins," Fitch wrote. "These characteristics are not viewed by Fitch as consistent with an investment grade rating."

Moody's put SLM's corporate family rating and its long-term ratings on review. It maintained the company's not prime short-term ratings.

Shares of SLM gained $1.02, or 4.4 percent, to $24 in afternoon trading. The stock reached a multiyear high of $26.17 earlier.