WASHINGTON - Four nonprofit student loan lenders are urging the Treasury Department to provide issuers of student loan-backed debt with liquidity facilities, such as standby purchase agreements, so that the issuers can convert their existing auction-rate securities into variable-rate demand obligations.
The proposal, which is detailed in a five-page letter written primarily by James Stipcich, president of the Montana Student Assistance Foundation, manager of the state's nonprofit student loan lender, is similar to another one made to the Treasury this week by the Regional Bond Dealers Association and the Education Finance Council, which represents nonprofits and state-level student loan lenders.
Meanwhile, UBS Financial Services Inc. proposed that the Treasury provide insurance for outstanding student loan ARS in a manner modeled on the monoline bond insurers, because the securities represent an asset class "whose intrinsic or economic value exceeds that of its market value."
"Therefore, a government-issued guarantee on these assets would repair the security and make a repurchase program unnecessary," said the 12-page letter, written by Tom Naratil, the head of the firm's ARS solutions' group.
UBS does not explain how auctions that have consistently failed for the last nine months would resume functioning normally with Treasury-provided insurance and appears to assume that the ARS market will continue to exist in the future, which some market participants say is uncertain. Neither UBS officials nor a spokesman would comment on the letter.
The proposals come in response to Treasury's request for comments on how it should implement a guarantee program of "troubled securities" that was authorized by the $700 billion bailout legislation signed into law last month by President Bush. They also both come after liquidity in the short-term markets has essentially dried up for issuers of tax-exempt debt.
Under Stipcich's proposal, Treasury would provide relief to student loan-backed ARS that cannot be auctioned and VRDOs through a "guarantee program" in which the department would enter into liquidity facilities, such as a standby bond purchase agreements that would last up to five years and allow issuers to tap markets with new bonds to refund "stranded ARS and/or VRDOs with new variable-rate demand notes."
At the end of the five-year period, the Treasury-backed standby purchase agreements would be replaced with privately negotiated liquidity facilities, assuming they are available.
In an alternative "purchase program" proposed by Stipcich, student loan issuers would issue refunding bonds which could be purchased or privately placed with the Treasury or a specially created "vehicle." Proceeds of the refunding bonds would go toward refunding outstanding ARS and VRDOs, and the student loans which backed the outstanding securities would be transferred to become collateral securing the refunding bonds.
The refunding bonds also would include an initial period of 60 months, during which the bonds would be callable at any time, to permit the issuers to remarket the bonds to the private market if the financial markets recover.
Stipcich said that the guarantee proposal is preferable because it would be cheaper than the alternative. A Treasury-provided liquidity facility would have "less of an impact on the federal budget" than department purchases of student-loan debt, he said.
Though Stipcich is the primary author of the letter from the lenders, it is co-signed by Donald Kohne, managing director of Student Lending Works in Westchester, Ohio; Quentin Wilson, president and chief executive officer of ALL Student Loan in Los Angeles; and Joseph V. Wood, president of ISM Education Loans Inc. in Indianapolis.
The four nonprofits hold over $4 billion in student loan assets, more than 60% of which are ARS and VRDOs "which have been severely impacted by the currently distressed financial markets," according to the letter.
In addition to recommending relief for existing ARS and VRDOs, the lenders' letter urges Treasury to consider providing letters of credit and liquidity facilities for new-money financings, the proceeds of which would ensure the available funds for student loans. Under this proposal, Treasury LOCs or liquidity facilities would be replaced by privately negotiated liquidity agreements when the credit crisis subsides.
