Sept. 26 (Bloomberg) -- SLM Corp., the largest U.S. student-loan company, rejected an overture from investors led by J.C. Flowers & Co. to renegotiate their $25.3 billion leveraged buyout agreement.

Flowers, run by former Goldman Sachs Group Inc. managing director J. Christopher Flowers, told the Reston, Virginia-based company it was no longer willing to pay $60 a share because of legislation that will cut subsidies to student-loan providers and a slowing economy. SLM, better known as Sallie Mae, said in a statement it would ``pursue all remedies available'' to complete the deal.

The subsidy cuts, set to be signed into law tomorrow by President George W. Bush, triggered an 18 percent drop in SLM shares since early July, when New York-based Flowers, whose investment group includes Bank of America Corp. and JPMorgan Chase & Co., told SLM that the measure threatened the buyout. Flowers's group said in a statement today it was ``open to discussing a revision'' to the terms.

``They'll get back to the table,'' said James Hill, co- chair of the private-equity group at Benesch, Friedlander, Coplan & Aronoff LLP, a Cleveland-based law firm. ``This is the art of negotiation. They need to see if they can negotiate the price and make it worth its return on equity.''

SLM fell $1.24, or 2.7 percent, to $45.01 at 4 p.m. in New York Stock Exchange composite trading, 25 percent below the buyout price.

Open to Discussions

``The conditions to closing under the merger agreement, if the closing were to occur today, would not be satisfied as a result of changes in the legislative and economic environment,'' the Flowers group said in its e-mailed statement. ``We have told representatives of the Sallie Mae board that we are open to discussing a revision of the transaction that reflects this new environment.''

In its statement, Sallie Mae said it ``firmly believes that the buyer group has no contractual basis to repudiate its obligations.''

Either the Flowers-led group or Sallie Mae would have to pay a $900 million fee for walking away from the deal unless it can show that a ``material adverse effect'' has occurred since the initial agreement, according to a regulatory filing.

The agreement between Flowers and Sallie Mae defined the term as events that harm the financial condition or operation of the company, such as changes in law that are ``in aggregate more adverse'' than legislative and budget proposals earlier in the year by the Senate, House and the White House.

Impact of Cuts

The student-loan measure will reduce government subsidies to loan makers by $20.9 billion over five years. Sallie Mae estimated that the bill would reduce so-called core earnings by 1.8 percent to 2.1 percent annually over five years, according to the statement.

The company also said it would set aside $100 million less in provisions for loan losses in its third quarter than in the previous quarter as a result of improved credit quality. SLM set aside $247 million for loan losses in the second quarter.

The Sallie Mae statement ``does not answer the question about whether there is some other, lower, price that might bring the parties together outside a court of law,'' Kathleen Shanley, senior bond analyst with Gimme Credit LLC in Chicago, wrote in a note to investors. ``Sallie Mae seems eager to have its day in court.''

LBO Slowdown

Sallie Mae is the latest LBO to run into trouble as investors balk at funding deals and the economy shows signs of faltering. Investment banks may have to write off $25 billion of LBO-related loans and bonds to fund takeovers, making them nervous about funding new deals, according to estimates by Citigroup Inc. analysts.

More than 50 companies have scrapped or reworked bond offerings since June as investors retreated from all but the safest of government debt as losses on securities linked to subprime mortgages spread, Bloomberg data show. Banks have committed to provide about $370 billion in debt financing for pending leveraged buyouts, including that of Sallie Mae, according to Bank of America Corp.

The cost to insure Sallie Mae debt against default initially fell today. Its credit-default swaps dropped as much as 55 basis points to 175 basis points, according to broker Phoenix Partners Group in New York, the lowest in more than three months. They climbed back to 220 basis points in later trading.

``We are rooting for the deal to fall apart, since we never thought an aggressively financed LBO made sense for a finance company,'' said Shanley of Gimme Credit. ``But it may be dangerous to jump to the conclusion the deal is off. We can't assess the odds of Sallie Mae prevailing on the legal merits of its case, since there is little if any precedent for this dispute.''

To contact the reporters on this story: William McQuillen in Washington at bmcquillen@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: September 26, 2007 20:39 EDT