In the News: Recent Developments

October 03 2008, 1:00am EDT

Brazos Asks Investors to Tender ARS

By Andrew Ackerman

WASHINGTON -The Brazos Higher Education Service Corp., one of the largest nonprofit student loan lenders in the country, may be the first to ask its institutional investors to voluntarily tender, at less than par, roughly $6 billion of outstanding taxable student-loan related auction-rate securities so that it can restructure them as term floating-rate notes.

In a three-page notice distributed late last week through Citigroup Global Markets, the Waco, Tex.-based student loan lender announced that it would offer to buy back the outstanding ARS, most of which are illiquid, that were sold under 13 different indentures going back to 1993. In all, the buyback encompasses 130 Cusips and the bulk of the $7.5 billion of outstanding ARS that was sold on behalf of Brazos.

The buyback is significant both for its size -Citi officials said that no other such deal has been attempted in the student loan market -and because large student-loan lenders have struggled with massive portfolios of billions of illiquid auction-rate securities since the ARS market collapsed in February. Officials at nonprofit student-loan lending agencies have said market conditions have made it too expensive for many of the lenders to restructure into different modes, the way that many municipal issuers have restructured their ARS debt into variable rate demand obligations.

But Brazos is hopeful that the new structure, which Citi has developed over several months, will “assist investors during this unprecedented market disruption and provide a framework for future transactions which will help restore confidence in the capital markets,” Murray Watson Jr., Brazos’ president and chief executive officer, said in a statement.

“We feel this new financing is a comprehensive, creative alternative that will allow us to help significantly reduce the bottleneck of auction-rate securities, allowing us to continue to fulfill our charitable purpose of providing educational assistance to students and borrowers,” he added.

Danielle Romero-Apsilos, a Citi spokeswoman, said that the restructuring with Brazos will not supersede the firm’s August settlement with state and federal regulators, in which it agreed to buy back or help investors liquidate $19.5 billion of ARS.

“Should any of Brazos’ institutional investors be covered by the settlement, we would take them out at par pursuant to our agreements,” she said.

Sources said yesterday that the tender-refinancing concept is a well established tool for issuers, at least in the corporate market. Joseph Fichera, senior managing director and chief executive officer at the New York-based financial advisory firm Saber Partners LLC, said that more issuers should consider buying back their debt closer to fair-market values, “which would most likely be less than par.”

“Those discounts would provide savings and provide liquidity in the secondary market where the brokers choose not to provide it,” he said, referring to dealers’ decisions to stop bidding for ARS in February.

But Citi officials said that the structure is a good fit for the student loan sector -and would be difficult to replicate elsewhere -because of the safety of the underlying student loans that back the securities, which are backed by a federal guarantee.

In exchange for tendering their existing ARS, Brazos will pay investors holding existing senior notes $920 to $940 for each $1,000 of notes tendered, plus any unpaid interest, depending on the indenture. Holders of existing subordinate ARS will receive $200 in cash, and a new subordinating interest in notes issued as part of the resecuritization.

Romero-Apsilos said that the buyback rates for senior debt reflects the estimated cash that can be raised through the resecuritization.

The mechanics of the tender and resecuritization is complex, but Leon Higher Education Authority Inc., a Texas nonprofit corporation for which Brazos acts as master servicer, is formally making the offer to purchase or exchange the ARS and will issue the new term floating-rate notes on behalf of Brazos, according to tender documents.

For the restructuring to proceed, Brazos needs investors holding 95% of the existing senior notes in each of the 13 indentures to consent to the tender, while it needs investors holding 99% of the subordinate notes in the indentures to consent. Of the $6 billion, most of which is taxable, $5.1 billion is senior debt and $831 million is subordinate, Citi said.

Under the terms of the tender notice, investors who wish to participate in the restructuring have until Oct. 17 to indicate via their bank or broker that they are interested in tendering their ARS. On Oct. 20, Brazos will select which indentures to initially include in the resecuritization. Nov. 6 is the date at which the tender will expire and the new term floating-rate notes will price. All dates are subject to extension, Citi officials said.

Historically, Brazos is one of the largest nonprofit lenders in the Federal Family Education Loan program, though it suspended its participation in the program earlier this summer when it could not secure crucial nbridge loans” that it needed to participate in a new, two-year liquidity program run by the Department of Education.

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