Massachusetts officials are working on what could be the largest fixed-rate student loan bond deal this year, a $400 million transaction to help finance private undergraduate and graduate loans for the upcoming school year.
Assured Guaranty Corp. will wrap the private-activity bonds, which are subject to the alternative minimum tax. Tom Graf, executive director of the Massachusetts Educational Financing Authority, said his office is hoping to issue the bonds within the next couple of weeks.
"We still need to do a mini road show and talk to the right people, and then make a determination on timing," Graf said.
Morgan Stanley is the senior underwriter on the transaction, with Goldman, Sachs & Co. and JPMorgan co-managers. Public Financial Management Inc. is the financial adviser. Mintz, Levin, Cohen, Ferris, Glovsky and Popeo PC is bond counsel.
According to the preliminary official statement, the transaction includes two term bonds, one for $252 million maturing in 2023 and the second for $148 million maturing in 2032. The deal does not include serial bonds because student loan investors are looking for longer maturities.
"I think, right now, my sense is the market's a little more receptive to [term bonds] and that's what you have to do here is to make sure that you're creating a structure that would appeal," Graf said.
A recent $350 million, fixed-rate student-loan deal in New Jersey offered two term bonds and did not include serials. Those terms were a 2021 term of $105.1 million that priced at par at 5.875% and a 2030 term of $244.8 million, which priced at par at 6.125%. The New Jersey Higher Education Student Assistance Authority sold the bonds on Aug. 1. The bonds are also subject to AMT and Assured Guaranty insures the debt.
Both the Garden State and the upcoming Massachusetts transactions finance private, fixed-rate student loans via fixed-rate, private-activity bonds. Yet the New Jersey bonds carry the state's moral obligation pledge, an additional security boost that the Massachusetts deal, backed solely by the loan repayments, currently does not have.
"New Jersey would have more potential investors because the moral obligation appeals to a much wider audience," said Matt Fabian, managing director at Municipal Market Advisors. "The structured finance deal, that is a little more exotic in this environment and they're going to have to work a little bit harder to find investors for it."
Yet Fabian said investor interest should be there for Massachusetts.
"I think it just takes a little more work to get that done, but there's no reason why they shouldn't be able - if they can structure a deal with a either fixed rate or a liquidity-supported floating rate - if the cash flows can work with that structure, there's no reason they couldn't come to market."
For the past few years, student loan authorities had used auction-rate securities to finance loans for their clients. With the collapse of the auction-rate market in mid-February, authorities must now find new strategies to help finance their student loan programs.
