Sunday, May 11, 2008

Auction Rate Losses For Missouri Student Loan Notes

The Missouri Higher Education Loan Authority (MOHELA) plans to buy back up to $30 million of its $3.5 billion worth of outstanding auction-rate bonds.

The move would make the state's student loan authority the first issuer of auction-rate securities to publicly announce its intention to repurchase its securities in the secondary market, according to New York-based Restricted Stock Partners. That firm manages the Restricted Securities Trading Network, an online trading platform for buying and selling illiquid assets, through which MOHELA will repurchase its bonds.

MOHELA's buyback would provide liquidity for some investors who have been unable to sell their bonds in recent months. Student-loan bond securities historically have been easy to buy and sell. But as the credit markets seized up in the wake of sub-prime mortgage loan defaults, the market for bonds backed by student loans also froze. That has caused auctions of student loan bonds to fail since mid-February, and investors have been unable to sell them and get their money out.

Investors who sell back to MOHELA will take a loss, however. The student loan authority stated it would only repurchase its bonds at a discounted price, though it did not specify the size of the discount it would seek, according to a disclosure filed May 7 with the Nationally Recognized Municipal Securities Information Repositories.

MOHELA, headquartered in Chesterfield, has about $5 billion in total bonds outstanding of which approximately $3.5 billion were sold as auction-rate securities.

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