The Massachusetts Educational Financing Authority (MEFA) is issuing $400 million in education loan revenue bonds; it is the first private student loan securitization of the year from the state authority. The deal hits the market as private student lenders have encountered issues shoring up capital.
However, state authorities have also faced funding difficulties as a result of the credit crunch.
In fact, the deal hits the market shortly after the company announced in early August, the time many college bills come due, that it was unable to secure funding for 2008 to 2009 academic year education loans.
"While we continue to pursue every possible option, raising the necessary funds to offer fixed interest rate private education loans is taking longer than originally projected and has become even more challenging," MEFA's Executive Director Tom Graf said in a statement earlier this month.
This is MEFA's first attempt to tap the capital markets this year, the company said.
As the market is optimistic that states are either going to grow their student loan programs or create them, this may also be the start of similar deals to come.
Indeed, states are recognizing the importance of keeping these agencies up and running. On Aug. 1, a letter signed by all 39 Senate members was delivered to Massachusetts Governor Deval Patrick, urging him to take "immediate action" to address the MEFA problem, according to the Malden City Web site, a town fives miles north of Boston. Patrick responded by asking the Pension Reserves Investment Management Board (PRIM) to invest $50 million of the state pension funds' $51.7 billion in assets to purchase bonds at an upcoming bond sale planned by MEFA to help finance its student loans.
Massachusetts State Treasurer Tim Cahill rejected the plan since it did not satisfy PRIM's "fiduciary responsibility to taxpayers" and statutory requirement that it generate an 8.25% rate of return. It instead suggested a pledge of $450 million in taxpayer money as one-time collateral for MEFA, the Web site said. No conclusive resolution had been formally announced by press time.
"At this point borrowers are having a difficult time finding financing outside of these types of agencies. We are getting calls from numerous other authorities that are looking to tap the market right now," said Jeff Nabi, senior managing director, consumer and mortgage backed securities at Assured Guaranty.
The bond insurer, one of the few monolines left with a triple-A rating, is providing a wrap on the deal, which should bolster the transaction's reception by the market.
Many of these types of public programs did not offer enough yield in the past. These deals were trading much tighter compared to where the credit markets were and a wrap did not provide much value, Nabi said. "But in today's market, with wider spreads, we can help them access a market they might not have access to." A wrap also reduces the execution costs, Nabi said, however; spreads are still wider in the market versus a year ago.
Assured Guaranty is not only a new choice of insurer for MEFA, which had MBIA and Ambac Assurance Corp. wrap prior issuances, but is also relatively new to the sector altogether. While the monoline said it has been examining the market for years, it has been cautious about making an entrance.
"The public sector traditionally has always had a lot of options and what you are starting to see now is that because of the major dislocation in the capital markets, their options are more limited right now," Nabi said.
Last month, the monoline closed a $350 million fixed-rate tax-exempt financing for the New Jersey Higher Education Student Assistance Authority. It was the first insured primary market student loan transaction for the guarantor and the first of several student loan programs that Assured said it was considering.
The bond insurer will provide a guaranty on all bond principal and interest payments in the MEFA deal. The bonds have an underlying rating of double-A.
Outside of the wrap, the deal also benefits from tighter loan standards. MEFA recently changed underwriting guidelines to increase minimum FICO requirements, according to a recent Fitch Ratings presale report. This should help offset the risk of these unsecured private loans, which could expose the trust to higher net losses than FFELP loans guaranteed by the Department of Education, Fitch said.
The Series H bonds are being issued out of a new discrete trust and proceeds are slated to acquire $375.3 million credit tested private student loans through Sept. 1, 2009. The remainder of the proceeds will be used to fund the capitalized interest and reserve accounts.
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