Banks Lift Embargo on Student-Loan Refis

A shift in strategy at Citigroup, RBC Capital and UBS could result in an increased flow of student-loan securitizations early next year.

The expectations mark yet another turn in the prolonged auction-rate debt saga. As investors in such deals, Citi, RBC and UBS repeatedly rebuffed earlier requests by issuers to allow buy-backs of the obligations. But each of the banks lately has softened that stance.

Here's the plan: The institutions would sell their auction-rate student-loan paper back to the issuers, which would raise the money for the repurchases by simultaneously selling fresh floating-rate securities backed by the same collateral - credits written under the U.S. Department of Education's now-expired Federal Family Education Loan Program.

The lenders seeking to retire their auction-rate debt are mainly not-for-profit players, including Arkansas Student Loan Authority, Brazos Higher Education, Illinois Student Assistance and North Carolina State Education. Citi, RBS and UBS would likely underwrite their new deals, and would offer them broadly to investors. That would set the arrangements apart from some past exchange programs in which issuers have simply swapped out bondholders' auction-rate positions for new floating-rate paper.

So just how much is issuance set to rise? Underwriters expect to see $5 billion of student-loan securitizations hit the market during the first three months of 2011, driven largely by refinancings of auction-rate paper. That compares to $15.3 billion of education-finance deals so far this year, according to Asset-Backed Alert's ABS Database.

Issuers of auction-rate bonds have been looking for ways to retire the high-cost obligations ever since the market for such securities imploded in February 2008. Citi, RBC and UBS balked at buy-back offers earlier on because they didn't feel the issuers were offering high-enough prices. More recently, however, they've deemed it best to get the transactions off their books.

Because each of the banks is a heavy investor in auction-rate student-loan debt, the shift represents perhaps the biggest opportunity yet for issuers to refinance. Citi, for instance, is the top holder of Brazos' auction-rate debt - at $5 billion.

It remains to be seen how investors will react to the fresh offerings. Buysiders have been cool to recent student-loan transactions, forcing issuers to pay higher yields than they might have a few months ago while scaling back their bond sales by as much as half. The weakening conditions have even pushed some issuers to the sidelines, including Sallie Mae.

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