A MAC Traffic Jam at Sallie Mae?

As J.C. FLowers attempts to break off its $25 billion buyout of Sallie Mae, it is trying to collect “material adverse changes” like a baseball-card enthusiast seeking the 1909 Honus Wagner. Is it about to be dealt another?

The U.S. House of Representatives passed a bill last week that would eliminate a tax-collection program launched by the IRS last year. The bill (click here, and search for HR 3056) has received little attention, but it turns out a Salle Mae subsidiary, Pioneer Credit, is one of only two companies enrolled. The program allows third-party companies to collect taxes from delinquent taxpayers on behalf of the IRS. Some lawmakers are suspicious of the program because it gives private-sector companies the right to collect a taxpayer’s personal information.

Now, in and of itself, the latest bill probably wouldn’t make a big enough dent in Salle Maes operations to constitute a break-up-worthy MAC. Pioneer Credit can retain only up to 24% of the dollars it collects and, in doing so, it generates a sliver of Sallie Maes overall income. Also, the bill still must win approval in the Senate, where its prospects are unclear. The legislation may have a potential enemy in Sen. Chuck Grassley, ranking Republican on the Senate Finance Committee. Grassley hails from Iowa, which is where the second company involved in the tax-collection program, CBE Group, is based.

If passed, however, the bill could add some heft to what appears to be a growing mound of MAC evidence. There is a new student-lending law that will slash the government subsidies provided to lenders such as Sallie Mae, which the Flowers group argues could cut the company’s revenue by roughly 20% a year. There is the recent turmoil in the credit markets, which has made debt financing more expensive and imperiled many buyouts. And, there is Sallie Mae’s third-quarter swing to a loss of $344 million, which the company partially blamed on the intense buyout battle.

As pointed out in a Strategas Research Partners report, passage of the latest bill could strengthen J.C. Flowers’ claim that Sallie Mae has suffered so many adverse changes to its business in recent months that the private-equity firm and its buyout partners are legally entitled to walk away from the buyout deal without paying the $900 million break up fee. As the blogger formerly known as Felix Salmon (now Portfolio.com’s Market Movers blog) pithily notes, “Flowers doesn’t need a Material Adverse Effect, he just needs an Adverse Effect.”

Of course, a judge ultimately will decide whether or not a MAC has occurred, and the process of untangling this sticky situation starts Monday.