Massachusetts officials would like to boost investor interest on an upcoming $400 million Massachusetts Educational Financing Authority new-money bond deal, yet differ on how best the state should help the authority with the private-activity bond transaction.
Last week, Gov. Deval Patrick announced that he favors having the state's pension fund buy $50 million of the tax-exempt, fixed-rate deal. Morgan Stanley is set to price the bonds within the next two weeks, according to Tom Graf, MEFA's executive director. Public Financial Management Inc. is the financial adviser on the sale and Mintz, Levin, Cohen, Ferris, Glovsky and Popeo PC is bond counsel.
In response to the governor's proposal, state Treasurer Timothy Cahill, who chairs the Pension Reserves Investment Management Board, called PRIM, said he would not support using pension investment funds to help the $400 million bond deal at market. Instead, Cahill prefers allowing the commonwealth to extend a moral obligation on the entire debt, meaning that the state would be responsible for replenishing the transaction's debt service reserve fund if MEFA was unable to sustain the debt service funding on the bonds.
"Instead of sacrificing PRIM's ability to get the best possible return on investment, the commonwealth should step in and offer support to these students and their families in a limited but effective way," Cahill said via e-mail.
The $400 million transaction could help finance 12,000 to 15,000 student loans for higher education in the upcoming school year, according to Graf.
Patrick administration officials said having PRIM, which has a $51.3 billion trust, buy $50 million of the bonds could help spur investor confidence for the student-loan bonds.
"I think anytime you bring to the table investors who have already expressed an interest, it's positive and goes a long way to attracting others," Graf said.
Before the market collapsed earlier this year, most student loan bonds were issued in auction-rate mode. In mid-February however, the market for auction-rate securities failed, leaving investors holding illiquid securities and issuers forced to pay higher interest rate costs. At that time, Moody's Investors Service pegged the size of the auction-rate student-loan market at $86 billion.
"These high interest rates on SLARS reduce the availability of excess cash in student loan asset backed securitizations," according to the Moody's report. "This excess cash is expected to be available to cover net losses, and in many cases, to bring a trust to an equal asset-to-liability ratio. To the extent interest rates remain elevated or at the higher failed auction rate, the excess cash available for the trust can be reduced substantially."
Because of investors' problems in the auction-rate student loan market, there is concern a new student loan deal, despite being fixed-rate, might have trouble attracting investors.
MEFA's annual debt issuance and its private-activity volume capacity has grown each year over the past five years due to increased demand for low-interest student loans. Graf said the authority could be back in the market later this year if the upcoming $400 million transaction fails to provide an adequate amount of loans for MEFA's client base.
"It's such a different year with all the changes that we've had federally and then the disruptions in the capital markets," Graf said. "It's really hard to peg what the demand is out there and obviously its much later in the season than we're used to, so it's hard to gauge if the number that we ultimately raise will be sufficient and if it isn't, we'll be back in the market trying to raise more in the fall."
Cahill's proposal to extend the state's moral pledge onto the $400 million of debt follows a similar initiative to help the Massachusetts Turnpike Authority as it gears up for a $800 million refinancing by the end of the year.
On Feb. 1, lawmakers approved legislation enabling the commonwealth to extend its state-appropriation pledge to the $800 million of refinancing debt and extend the state's general obligation pledge to five floating-to-fixed-rate swaptions with UBS Securities LLC as counterparty. Patrick has yet to sign the bill into law.
