Tuesday, November 10, 2009

New York Sets $100M Student Loan Bonds Deal

nys unemployment insurance

New York State plans to market $100 million of tax-exempt fixed-rate student loan bonds this week under a new program. The New York Higher Education Finance Authority will offer the debt to retail investors tomorrow, with institutional sales beginning on Thursday.

Banc of America-Merrill Lynch will lead manage the deal. Morgan Stanley is co-senior manager. Hawkins Delafield & Wood LLP is bond counsel.

The bonds will be sold as serial and term bonds with maturities from 2012 to 2026.

The bond proceeds will be used to purchase student loans under the New York Higher Education Loan Program, or ­NYHELP, which was created by state legislation enacted this year.

The program allows the State of New York Mortgage Agency, or SONYMA, to issue bonds as the New York Higher Education Finance Authority.

The New York State Higher Education Services Corp. will administer the loan program.

The HESC manages state grant and scholarship programs and is also a guarantor of Federal Family Education Loan Program loans, currently administering $22 billion of outstanding loans.

“New York was one of just a few states nationwide that did not have a state private-student loan program,” said Charles Treadwell, the HESC’s senior policy adviser.

“The number and availability of private loan products has really dropped off since the asset-backed securities situation has limited the amount of financing available to private lenders.”

The program is a sort of lender of last resort, filling the gap between college costs and available aid and federal loans.

Qualified borrowers can borrow up to $10,000 annually only after they have exhausted other federal, state, institutional, and private aid.

In most cases, borrowers will have to have a co-signer with a FICO credit score of 660 or greater. Undergraduates at four-year institutions can borrow up to $50,000 cumulatively under the program.

The deal’s size correlates to projected demand for spring 2010 loans. Thirty colleges in the state reported to the HESC projected demand of $87.8 million for the loans and the corporation is negotiating participation agreements with additional colleges as well.

Leading the demand was New York University, which projects demand of $74.4 million of loans in spring 2010.

Marian Zucker, executive vice president for housing programs and policy at SONYMA, said the program could reach $350 million annually.

The state plans to allocate that amount of private-activity bond volume cap for the program’s first year.

The loans will be originated through participating lenders. So far only M&T Bank Corp. has signed on.

The bonds are backed by loan repayments and have the additional security of a default reserve fund. The fund will be established to buy student loans that go into default after 180 days, thus protecting the bondholders from delinquent accounts. A state appropriation, expected to be $4.6 million, will initially be deposited into the default fund.

Fees paid by borrowers and participating colleges will also go into the fund, as well as several other sources.

The bonds also will have a debt service reserve fund set at the greater of 2% of outstanding bonds or $500,000, according to the preliminary statement.

The state is entering the sector at a time when the student loan market has shrunk. New York has not sold bonds for student loans since 1995, when the Dormitory Authority of the State of New York sold $29.1 million, according to Thompson Reuters.

Nationally, municipal issuers have sold $109.77 billion of student loan bonds since 2000.

Annual issuance peaked during the past 10 years at $17.87 billion in 2005, and after sloping downward for two years, it dropped sharply in 2008 to $5.28 billion from $11.5 billion in 2007.

Issuance this year is on track to be the lowest in the past decade, with $1.57 billion of student loan bonds sold to date.

The collapse of the auction-rate security market last year curtailed issuance of student loan bonds. At the same time, the student loan landscape may be changing.

In September, the House approved a bill to eliminate the Federal Family Education Loan program and the Senate may soon take the issue up. President Obama has called for the program to be replaced by direct loans from the federal government.

When crafting the details of the new program, SONYMA and the HESC looked closely at student loan programs in Massachusetts and Rhode Island.

A NYHELP presentation noted that recent difficult market conditions has led lenders to raise their standards, including raising credit score requirements for borrowers, limiting deferred loans and eliminating or curtailing borrower benefits.

One product the Rhode Island Student Loan Authority eliminated last year was a variable-rate loan program called College Bound.

“That was a product of the credit crisis,” said Noel Simpson, chief financial officer of RISLA. “There was no market to sell bonds to investors who were interested in assets that provided a variable rate of return.”

Difficulty getting liquidity and credit problems in the bond insurance industry also caused problems.

“There’s not a problem with the underlying student loan assets, it’s more of an issue with investors’ appetites given the losses they’ve experienced in the mortgage bond arena,” Simpson said.

“It’s forced the issuers to look for a fixed-rate program that gives the student borrowers some comfort that their interest rate and payment isn’t going to change over the course of time and the investor has the comfort that their return is not going to change over time.”

Evan Rourke, portfolio manager at Eaton Vance, said his firm hadn’t invested in student loan bonds recently.

“The reasons buyers are nervous is the perceived risks of individuals defaulting on their loans because of high unemployment,” Rourke said.

The recession and credit crunch has caused stress in the student loan industry. According to a Fitch Ratings report, performance in the private student loan sector is volatile and borrower default levels remain elevated.

“Delinquencies have been running high,” said Fitch analyst Melvin Zhou. “There are some early signs that levels may be plateauing, but that remains to be seen.”

The bonds did not have a published rating at press time last week, but the issuer said they expected to receive A-plus ratings from Fitch and Standard & Poor’s.