JPMorgan to Buy Student Loan Auction-Rate Notes

JPMorgan to Buy Student Loan Auction-Rate Notes

April 22 (Bloomberg) -- JPMorgan Chase & Co. said it will buy as much as $1.1 billion in notes from three student-loan trusts, providing limited relief to investors in part of the failed $330 billion auction-rate securities market.

The offer to buy the notes from three Collegiate Funding Services trusts created in 2003 and 2004 expires May 20, New York-based JPMorgan said in a statement. Holders will receive face value plus interest. JPMorgan, the third-largest U.S. bank, bought the student lender in 2006.

The proposed buyback involves a part of the auction-rate market that has seen fewer buybacks and refinancings since widespread failures in February froze investors' cash. U.S. municipal borrowers make up most of such restructurings, as states, cities and hospitals escape higher debt expenses.

Structured loan trusts are generally protected by rate formulas that prevent interest from staying too high, said Matt Fabian, managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. ``Their incentive to restructure is limited,'' Fabian said.

The auction notes from the trusts are secured by loans under the Federal Family Education Loan Program and represent ``the only auction-rate notes associated with the student- lending business'' that JPMorgan bought, said Thomas Kelly, a bank spokesman.

Dealers that run the periodic bidding to determine interest on such debt stopped using their own capital to prevent widespread auction failures, which occurred when there were too few bidders. That left investors unable to liquidate their holdings through the normal auction process.

Tender Offer

The JPMorgan tender offer involves the 2003-A, 2003-B and 2004-A trusts. The auction-rate securities were sold along with other bonds as part of $3 billion in structured deals. Those obligations helped to build reserves, using the difference between interest paid through auction-rate bidding and the rate customers pay for student loans.

The Collegiate Funding Services trusts experienced failed auctions that led to rates ranging from the London interbank offered rate plus 2.50 percentage points to Libor plus 1.50 points, Kelly said.

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