Although concerned about the auction failures, Jim Stipcich, chief executive officer of the Student Assistance Foundation, reiterated that student loan funding for Montana college students for this fall is “in good shape.”
“The important message is that we have financing in place for Montana student loans for next fall - $175 million for the 2008-09 academic year - and we don't see disruption in that financing,” he said.
The lone inquiry came from a reporter from Montana State University's student newspaper, the Exponent, said Brandi Payne, MSU's director of financial aid.
“The bottom line is that Montana students are in great shape and the interest rate is set by the federal government,” said Mick Hanson, vice president of financial aid administration at the University of Montana.
Had any students called, they would have been told “there's no problem at the moment,” Hanson said. “It's good for people to be aware. We need to make sure people don't panic.”
On Wednesday, Stipcich said MHESAC had been unable to sell $300 million of its bonds at auction, which would cost it $250,000 a month.
Stipcich didn't have an estimate what the additional $90 million bond auction failure Thursday would cost. The next auction is scheduled for Wednesday, and Stipcich said he couldn't predict what would happen then.
The Wall Street Journal has reported that auctions of long-term student loans by Goldman Sachs Group, J.P. Morgan Chase and Co., Citigroup Inc. and others failed to attract the usual interest from investors because of the market's current credit and liquidity woes. Bonds to finance museums, hospitals and other facilities also are being snubbed.
MHESAC has $2 billion of debt to finance student loans. Of that, Stipcich said $1.1 billion is held in what are called auction bonds. These are bonds in which interest rates are reset every 35 days. These bonds, sold in $100,000 units, often are rolled over and repurchased by the same institutional bondholder with the interest rate reset to reflect current rates.
The auction failures, in turn, have driven up the interest rate that MHESAC must pay to the current bondholders up to 10 percent, up from the usual 5.5 percent to 6 percent. Stipcich said he did have an inquiry from an individual investor interested in the bonds, but they are sold only to institutional investors.
“In order to address this issue, MHESAC is considering refinancing a significant portion of its outstanding auction rate securities,” Stipcich said in a press release. Its ability to do that depends on a number of factors, including the availability of certain financing vehicles and related liquidity or credit “enhancement facilities,” or both.
Of the remaining $900 million of MHESAC's $2 billion portfolio, about $725 million is financed using fixed-rate, long-term bonds or bonds financed at a fixed rate over a given index, Stipcich said.
The remaining $175 million of MHESAC's portfolio consists of investments in variable-rate demand obligations. A separate third party is contractually required to buy these bonds if sellers want to sell them and no other buyers are interested.
Bloomberg.com News reported Thursday that New York Gov. Eliot Spitzer told lawmakers in Washington that the fallout arising from losses from subprime lending may cause a “tsunami” for the U.S. economy.
He said it has hurt municipal bond markets by raising the cost to borrow money and by lowering the value of debt held by investors. Spitzer predicted the municipal bond problems faced by the auction market would have widespread impacts.
“It will affect the cost of college loans,” Spitzer said. “It will affect museum budgets. It will affect state and local taxes.”
Despite this turmoil in financial markets, Stipcich said MHESAC's senior auction bonds retain the highest possible ratings issued by national rating agencies.
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