Brazos $6B Below-Par Tender in Doubt

WASHINGTON - An insufficient number of institutional investors agreed to tender at less than par roughly $6 billion of outstanding taxable student-loan-related securities issued on behalf of the Brazos Higher Education Service Corp. before a preliminary deadline on Friday, casting a cloud over a proposed restructuring of the securities into term floating-rate notes.

Though it was unclear yesterday if the nonprofit student loan lender would still be able to go forward with the restructuring, since there were not enough tenders prior to Friday's "early consent" deadline, investors will now have until Dec. 4 to tender their securities, according to a statement released yesterday by Citigroup Inc., which is the manager of the transaction and Brazos' solicitation agent.

Under the transaction, which is the largest of its kind, Brazos is seeking to buy at less than par its outstanding auction rate securities, most of which are illiquid and 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 were sold on behalf of Waco, Tex.-based Brazos. The restructuring comes after the student-loan lender has struggled most of the year to manage its enormous portfolio of illiquid ARS following the market's collapse in February.

For the restructuring to proceed, Brazos needs institutional investors holding 95% of the existing senior bonds in each of the 13 indentures to consent to the tender, and it needs institutional investors holding 99% of the subordinate notes in the indentures to consent.

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.

But as of 5 p.m. Friday, investors offered to tender just $2.4 billion of existing senior notes and $500 million of subordinate notes. That represents 5.1% to 69.8% of the senior notes under each of the 13 indentures and between 8.1% to 100% of the subordinate notes under each of the indentures, Citi said.

Of the $6 billion, most of which is taxable, $5.1 billion is senior debt and $831 million is subordinate, according to Citi. The investment bank owns approximately $1 billion of outstanding ARS that it could tender in the exchange, according to a Citi source.

The original early consent deadline was Oct. 17, though Brazos pushed it back to Friday to give investors extra time to consider the offer, which was originally announced at the end of September.

Sources familiar with the transaction said yesterday that the "audience of investors" that own Brazos' securities "is extremely granular" and holders may just need more time to consider the tender, especially considering the overall volatility in the markets. But one source who asked for anonymity conceded that it may not go forward at all.

Though most of the debt remains illiquid, Brazos' investors are still receiving a maximum rate that fluctuates per quarter and is roughly 60 to 100 basis points above the London Interbank Offered Rate, sources said. The securities offered for tender are different from some other types of taxable student loan-backed ARS whose maximum rates are capped over a period of time and that alternate between high maximum rates and zero percent interest rates, so that the average rate does not exceed the annualized capped rate, sources said.

A Citi spokeswoman has said that the restructuring with Brazos is consistent with the firm's August preliminary settlement with state and federal regulators, in which it agreed to commit its best efforts to bring liquidity to institutional investors holding $12 billion of ARS.

The mechanics of the tender and re-securitization 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.

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