A buyout consortium reduced its offer for SLM, America’s largest student loan provider, by about $4 billion (£1.96 billion) yesterday, blaming the turmoil in financial markets and new legislation for significantly reducing the group’s prospects.

The buyout group, which said last week that it would not pay the $25 billion price that had been agreed in April, knocked $10 off its $60-a-share bid, replacing it with warrants that would pay up to $10 a share if the group performs strongly.

The consortium, made up of JC Flowers, JPMorgan Chase and Bank of America, claimed that a new law would result in much steeper cuts in federal subsidies to SLM than had been expected.

It added that the tightening credit markets would add to the problems of SLM, known as Sallie Mae, by making it more difficult and more expensive to access funds.

These developments constituted a “material adverse change”, since together they would knock 14 per cent off the group’s profits in 2009 and 20 per cent in 2012, giving the consortium grounds to submit a lower offer, it argued.

J. Christopher Flowers, the founder of JC Flowers, said in a letter to Sallie Mae’s board: “This revised proposal offers full and fair value to the Sallie Mae shareholders in the light of the changes that have occurred since the signing of our agreement, and a significant premium to what the company’s unaffected share price would likely be based on historical trading ranges and current market conditions.”

However, the student lender yesterday rejected the lower offer. It maintained that the credit crunch and new legislation did not constitute a material adverse effect.

“Our contract is with Bank of America and JPMorgan Chase, two of America’s largest and strongest banks,” Sallie Mae said in a statement. “We expect these banks to honour that contract.”

The credit crisis has made it more difficult for private equity firms to finance leveraged buyouts.

The consortium was keen to reduce the price because the cost of servicing the debt used to fund the deal jumped after the debt markets tightened in May.

The reduction, which equates to about 17 per cent of the price, comes just a week after Goldman Sachs and Kohlberg Kravis Roberts walked away from their agreed $8 billion takeover of Harman International Industries, the speaker maker.

They also claimed a “material adverse change” since the deal had been agreed.

The first significant price cut on a previously arranged leveraged buyout occurred in August, as Home Depot agreed to cut $2 billion from the sale price of its building supplies unit in the face of threats that the acquiring consortium would walk away.

The consortium — Carlyle, Bain Capital and Clayton, Dubilier & Rice — argued that the housing market slump had significantly hurt the unit’s prospects, justifying the lower price tag of $8.5 billion.

Under the warrants introduced as part of the revised Sallie Mae offer, the lender’s shareholders would receive $7 a share if it met the company’s previous projections.

Exceeding expectations could result in payments of up to $10 a share.

Under the new legislation, student loan companies will receive $22.3 billion of subsidy cuts, compared with President Bush’s proposal for only $15.5 billion.

This translates into a reduction in net income of between 1.8 per cent and 2.1 per cent each year over the next five years, Sallie Mae said.

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