Massachusetts officials are moving closer to selling a $400 million new-money, student loan bond sale, with hopes that the deal will gain as much investor interest as a recent New Jersey higher education loan transaction.
Both deals include fixed-rate bonds backed by private, fixed-rate loans for higher education. That structure differs from the majority of auction-rate student loan bonds that higher educational student assistance authorities have issued over the past few years to help fund their programs. Yet the $350 million New Jersey Higher Education Student Assistance Authority transaction, which priced on Aug. 1, had one perk the upcoming Massachusetts Educational Financing Authority bond deal has yet to gain - a moral obligation from its state.
Both New Jersey and Alaska offer a moral obligation on their student loan bonds. More higher education student financing authorities and their states are evaluating the benefits of adding a state's moral pledge to help support student loan bond transactions and gain additional investor interest, according to Barbara Thomas, executive director and head of the student loan group in public finance at Morgan Stanley, who worked on New Jersey's $350 million deal.
"There are other states out there, with private student loan programs, who are considering the potential of supporting higher education through this moral obligation pledge to the bonds," Thomas said.
Massachusetts' state treasurer, Timothy Cahill, last week proposed having the state extend its moral obligation on the $400 million MEFA deal, which would obligate the commonwealth to replenish the bonds' debt service reserve fund if the authority was unable to sustain debt service funding on the bonds. That initiative has yet to move forward.
Gov. Deval Patrick proposed having the state's pension fund buy $50 million of the transaction to help boost investor interest, yet Cahill, who chairs that fund, said he does not support that proposal.
Meanwhile, the MEFA deal continues to progress, as officials selected an insurer to help support the bonds. MEFA's executive director, Tom Graf declined to identify which monoline would wrap the bonds. He said New Jersey's recent sale brings some confidence to the student-loan market.
"We're definitely hopeful. We are happy that New Jersey was able to pull it together and we hope to be right behind them," Graf said.
Morgan Stanley will also price the MEFA bonds. Public Financial Management Inc. is the financial adviser on the sale and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond counsel.
New Jersey's $350 million deal offered two term bonds, a 2021 term of $105.1 million priced at par at 5.875% and a 2030 term of $244.8 million priced at par at 6.125%.. All the bonds are insured by Assured Guaranty Corp. The 2021 term yielded 1.385 percentage points higher than the Municipal Market Data insured scale on Aug. 1. The 2030 term yielded 1.125 percentage points higher.
The New Jersey deal was the first large fixed-rate student loan issued this year so far, with the bonds receiving strong investor interest due to the program's two-decade history, solid management and track record, and the moral obligation pledge from the state, Thomas said.
"This was a highly successful transaction and demonstrated to the market that there is investor demand for private student loan backed bonds from issuers that have demonstrated a strong track record," she said. "The bonds also have to be structured properly."