Rule 15c2-12 Filing Cover Sheet This cover sheet is being sent with the submissions made through the Electronic Municipal Market Access system (“EMMA”) of the Municipal Securities Rulemaking Board (“MSRB”) pursuant to Securities and Exchange Commission (SEC) rule 15c2-12. Issuer Name: Brazos Higher Education Authority, Inc. Issue(s): See Attachments Filing Format: _X_ electronic http://www.brazos.us.com/ paper; if available on the Internet, give URL: CUSIP Numbers to which the information filed relates (optional): X Nine-digit number(s) (attach additional sheet if necessary): Six-digit number if information filed relates to all securities of the issuer: * * * A. X Annual Financial Information and Operating Data pursuant to Rule 15c2-12 Fiscal Period Covered 7/1/2012 – 6/30/2013 __ Monthly __Quarterly X Annual __Other:______ B. X Audited Financial Statements or CAFR pursuant to Rule 15c2-12 Fiscal Period Covered 7/1/2012 – 6/30/2013 C. __ Notice of Material Event pursuant to Rule 15c2-12 1.__ Principal and interest payment delinquencies 2.__ Non-payment related defaults 3.__ Unscheduled draws on debt service reserves reflecting financial difficulties 4.__ Unscheduled draws on credit enhancements reflecting financial difficulties 5.__ Substitution of credit or liquidity providers, or their failure to perform 6.__ Adverse tax opinions or events affecting the tax-exempt status of the security 7.__ Modifications to rights of security holders 8.__ Bond calls 9.__ Defeasances 10.__Release, substitution, or sale of property securing repayment of the securities 11.__Rating changes D. __ Notice of Failure to Provide Annual Financial Information as Required E. Notice of change of fiscal year end F. __ Other Secondary Market Information * * * I hereby represent that I am authorized by the issuer or its agent to distribute this information publicly: Signature: /s/ Ricky Turman Name: Ricky Turman Title: Chief Financial Officer Employer: The Brazos Higher Education Service Corporation, Inc. Address: 2600 Washington Avenue, Waco, Texas 76710 Telephone: (254) 753-0915 Email Address: [email protected] MUNICIPAL SECONDARY MARKET DISCLOSURE ATTACHMENT #1 TO COVER SHEET BRAZOS HIGHER EDUCATION AUTHORITY, INC. 2004A Indenture of Trust YEAR 2004 2005 2006 2007 SERIES I-A-2 I-B-1 I-A-2 I-A-3 I-A-4 I-B-1 I-A-9 I-A-10 I-A-11 I-A-12 I-B-2 I-A-14 I-A-15 I-A-16 I-B-3 I-A-2 I-A-3 I-B-1 I-A-9 I-A-10 I-A-13 I-A-14 I-A-15 I-B-2 I-A-1 I-A-2 I-A-3 I-A-4 I-A-5 I-B-1 CUSIP # 106238KS6 106238KQ0 106238LC0 106238LD8 106238LE6 106238LJ5 10620NAB4 10620NAC2 10620NAD0 10620NAE8 10620NAF5 10620NAH1 10620NAJ7 10620NAK4 10620NAL2 10620NAN8 10620NAP3 10620NAU2 10620NAW8 10620NAX6 10620NBA5 10620NBB3 10620NBC1 10620NBD9 10620NBS6 10620NBT4 10620NBU1 10620NBV9 10620NBW7 10620NBX5 BRAZOS HIGHER EDUCATION AUTHORITY, INC. Annual Continuing Disclosure Statement Regarding the 2004A Indenture of Trust, including: Student Loan Revenue Notes, Series 2004I-A-2 Student Loan Revenue Notes, Series 2004I-B-1 Student Loan Revenue Notes, Series 2005I-A-2 Student Loan Revenue Notes, Series 2005I-A-3 Student Loan Revenue Notes, Series 2005I-A-4 Student Loan Revenue Notes, Series 2005I-B-1 Student Loan Revenue Notes, Series 2005I-A-9 Student Loan Revenue Notes, Series 2005I-A-10 Student Loan Revenue Notes, Series 2005I-A-11 Student Loan Revenue Notes, Series 2005I-A-12 Student Loan Revenue Notes, Series 2005I-B-2 Student Loan Revenue Notes, Series 2005I-A-14 Student Loan Revenue Notes, Series 2005I-A-15 Student Loan Revenue Notes, Series 2005I-A-16 Student Loan Revenue Notes, Series 2005I-B-3 Student Loan Revenue Notes, Series 2006I-A-2 Student Loan Revenue Notes, Series 2006I-A-3 Student Loan Revenue Notes, Series 2006I-B-1 Student Loan Revenue Notes, Series 2006I-A-9 Student Loan Revenue Notes, Series 2006I-A-10 Student Loan Revenue Notes, Series 2006I-A-13 Student Loan Revenue Notes, Series 2006I-A-14 Student Loan Revenue Notes, Series 2006I-A-15 Student Loan Revenue Notes, Series 2006I-B-2 Student Loan Backed-Notes, Series 2007I-A-1 Student Loan Backed-Notes, Series 2007I-A-2 Student Loan Backed-Notes, Series 2007I-A-3 Student Loan Backed-Notes, Series 2007I-A-4 Student Loan Backed-Notes, Series 2007I-A-5 Student Loan Backed-Notes, Series 2007I-B-1 DATED AS OF DECEMBER 9, 2013 INTRODUCTION The terms of the Indenture provide that Brazos Higher Education Authority, Inc. (the “Authority”) will provide updated information in connection with its continuing disclosure obligation within six months after the end of each fiscal year. The Authority submits this Continuing Disclosure Statement (the “Statement”) in compliance with the agreement set forth in the Indenture for the Notes covered by this Statement. In the Indenture, the Authority agreed to provide updates of quantitative financial information and operating data regarding “The Student Loans” and “The Master Servicer”. In addition, the Authority agreed to provide updated information regarding the Authority including audited financial statements. The Indenture also provided that the Authority would provide updated information relating to the Subservicers and the significant Guarantee Agencies to the extent such information is reasonably available to the Authority. This Statement relates to the Notes indicated on the cover of this Statement and not any other bonds or notes which have been or may be issued by the Authority. The Notes covered by this Statement are payable solely from and secured solely by the Trust Estate created under the Indenture. The Notes are not general obligations of the Authority. Capitalized terms used herein but not defined shall have the meaning given such terms in the offering memorandum relating to each Series of Notes. DEFINITIONS “Indenture” means, for the purpose of this Statement, the Indenture of Trust, dated as of October 1, 2004, including all of the supplements, appendices and exhibits thereto as may be amended from time to time. “Notes” means, for the purpose of this Statement, the Senior Notes and Subordinate Notes issued pursuant to the Indenture and identified on the cover page of this Statement. “Senior Notes” means, for the purpose of this Statement, the Notes issued under the Indenture with a series designation “I-A” and identified on the cover page of this Statement. “Subordinate Notes” means the Notes issued under the Indenture with a series designation “I-B” and identified on the cover page of this Statement. THE AUTHORITY The Authority is a non-profit corporation organized in 1975 under the Texas Nonprofit Corporation Law. The Authority is located at 2600 Washington Avenue, P.O. Box 1308, Waco, Texas 76703, Telephone (254) 753-0915. The Authority’s fiscal year ends June 30 of each year. The Authority’s audited financial statements as of June 30, 2013, are attached to this Statement as Appendix A. 1 Outstanding Revenue Notes The Authority, as of June 30, 2013, had outstanding Notes issued under the Indenture in the respective principal amounts as follows: SERIES OF NOTES ORIGINAL PRINCIPAL AMOUNT OUTSTANDING PRINCIPAL AMOUNT FINAL MATURITY 2004I-A-2 2004I-B-1 2005I-A-2 2005I-A-3 2005I-A-4 2005I-B-1 2005I-A-9 2005I-A-10 2005I-A-11 2005I-A-12 2005I-B-2 2005I-A-14 2005I-A-15 2005I-A-16 2005I-B-3 2006I-A-2 2006I-A-3 2006I-B-1 2006I-A-9 2006I-A-10 2006I-A-13 2006I-A-14 2006I-A-15 2006I-B-2 2007I-A-1 2007I-A-2 2007I-A-3 2007I-A-4 2007I-A-5 2007I-B-1 362,600,000 70,000,000 200,000,000 223,000,000 240,000,000 33,000,000 281,957,000 272,393,000 128,573,000 324,759,000 69,100,000 300,000,000 192,000,000 153,000,000 50,000,000 296,650,000 152,100,000 50,000,000 233,233,000 416,567,000 80,050,000 60,050,000 30,050,000 50,000,000 100,000,000 100,000,000 100,000,000 75,000,000 75,000,000 50,000,000 95,473,000 70,000,000 33,100,000 223,000,000 240,000,000 33,000,000 43,785,000 272,393,000 128,573,000 324,759,000 69,100,000 60,275,000 192,000,000 153,000,000 50,000,000 122,835,000 152,100,000 50,000,000 32,835,000 416,567,000 69,600,000 60,050,000 30,050,000 50,000,000 100,000,000 100,000,000 100,000,000 75,000,000 75,000,000 50,000,000 6/27/2022 6/25/2040 12/26/2018 9/26/2022 3/26/2029 6/25/2041 12/26/2017 12/26/2019 9/27/2021 3/27/2023 6/25/2042 9/25/2023 3/25/2025 6/25/2026 6/25/2042 6/25/2023 12/25/2024 6/25/2042 12/26/2024 6/25/2026 6/25/2042 6/25/2042 6/25/2042 6/25/2042 6/25/2043 6/25/2043 6/25/2043 6/25/2043 6/25/2043 6/25/2043 Total $4,769,082,000 $3,472,495,000 The Notes issued under the Indenture are secured by the Trust Estate established under the Indenture. The Authority also has issued student loan asset-backed notes pursuant to other indentures, which notes are secured by separate and distinct trust estates. The assets of each trust estate are not crosscollateralized or cross-defaulted with the assets of any other trust estate. The total aggregate outstanding 2 principal amount of all of the student loan asset-backed notes issued by the Authority as of June 30, 2013, was $7,228,548,951. Student Loan Acquisition History From January 1, 1988 through December 31, 2008, the Authority purchased 2,450,783 student loans made under the Federal Family Education Loan Program in an aggregate principal amount of $16,755,197,954. On March 30, 2010, President Obama signed into law H.R. 4872 – the Health Care and Education Reconciliation Act of 2010 (HCERA). HCERA provides that after June 30, 2010, no new student loans will be made under the Federal Family Education Loan Program. Beginning July 1, 2010, all subsidized and unsubsidized Stafford loans, PLUS loans, and Consolidation loans can only be made under the government’s Federal Direct Loan Program (FDLP). Approximately $6,399,488,515 in principal amount of loans originally purchased by the Authority was outstanding as of June 30, 2013. THE STUDENT LOANS PARITY RATIOS. The ratio of assets in the Trust Estate to liabilities represented by the principal amount of the Senior Notes on June 30, 2013, was equal to approximately 114.76%. The ratio of assets in the Trust Estate to liabilities represented by the principal amount of the Senior Notes and the Subordinate Notes on June 30, 2013, was equal to approximately 102.46%. For purposes of these calculations, the value of the pledged student loan assets in the Trust Estate under the Indenture are calculated as 100% of the unpaid principal amount of the pledged student loans, plus any accrued but unpaid interest thereon. CHARACTERISTICS OF THE STUDENT LOANS. The total principal amount of Student Loans on deposit in the Trust Estate, as of June 30, 2013, was approximately $3,464,329,445. Set forth below in the following tables is a description of certain characteristics of the Student Loans held in the Trust Estate. Distribution of Student Loans by Loan Type Loan Type Balance (1) Percent of Loan Type By Balance Consolidation Plus Stafford Sub Stafford UnSub $ 3,449,637,493 1,133,757 6,706,597 6,851,598 99.58% 0.03% 0.19% 0.20% Total $ 3,464,329,445 100.00% 3 Distribution of Student Loans by Guarantee Agency Insurer or Guarantor Percent of Loans by Balance Balance (1) PHEAA ASA GLHEC USAF TGSLC Other Total FFELP $ 1,784,945,442 769,955,723 506,058,366 203,088,387 107,458,964 92,822,563 $ 3,464,329,445 51.52% 22.23% 14.61% 5.86% 3.10% 2.68% 100.00% Distribution of Student Loans by Borrower Payment Status Loan Status Balance (1) Percentage of Loans by Balance School Grace Deferment Forbearance Repayment Claims $ 74,313 25,632 324,684,147 291,281,803 2,833,722,646 14,540,904 0.00% 0.00% 9.37% 8.41% 81.80% 0.42% Total $ 3,464,329,445 100.00% Distribution of Student Loans by Federal Reinsurance or Private Reinsurance Federal or Private Reinsurance 4yr 2yr Prop. Consol. Balance (1) Percent of Loans by Balance $ 11,660,624 2,052,876 978,452 3,449,637,493 $ 3,464,329,445 0.34% 0.06% 0.03% 99.57% 100.00% Distribution of Student Loans by Subservicer Subservicer Xerox (ACS) AES (PHEAA) GLELSI SAF SLMA Balance (1) $ 9,870,389 2,243,919,174 198,121,971 807,476,045 204,941,866 $ 3,464,329,445 Percent of Loans By Balance 0.28% 64.77% 5.72% 23.31% 5.92% 100.00% (1) In each case, includes current principal balance due from the borrowers, but does not include accrued interest thereon to be capitalized upon commencement of repayment. 4 THE MASTER SERVICER The Master Servicer is The Brazos Higher Education Service Corporation, Inc., a private non-profit corporation organized on September 18, 1980, under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, to provide the Authority with student loan billing and servicing and to provide administrative support services to the Authority. The Master Servicer is headquartered in Waco, Texas and is governed by a ten-member board of directors. The members of the Board of Directors serve without compensation, except for the payment of expenses in connection with the business of the Master Servicer. As of June 30, 2013, the total number of borrowers serviced by the Master Servicer was approximately 420,000 aggregating approximately $9,432,029,167 in principal amounts. All of such Student Loans are serviced by the Master Servicer for the Authority or for separate nonprofit corporations. The Master Servicer has entered into separate subservicing agreements with several separate Subservicers for the performance of servicing duties for student loans held under the Indenture. As a result, servicing duties relating to student loans held under the Indenture are performed by the Subservicers. THE SUBSERVICERS The following general information concerning each Subservicer was supplied to the Authority by each Subservicer and has not been verified by the Authority. No representation is made by the Authority as to the accuracy or completeness of such information. Xerox Education Services, Inc. XEROX-ES acts as a loan servicer for the Authority. XEROXES is a for-profit limited liability company and a wholly-owned subsidiary of Xerox Corporation (“Xerox”). Headquartered in Norwalk, Connecticut, Xerox is a Fortune 500 company providing document technology, services, software and supplies for production and office environments, as well as business process and technology outsourcing solutions to world-class commercial and government clients. Xerox’s common stock trades on the New York Stock Exchange under the symbol “XRX.” XEROX-ES has its headquarters at 2277 E. 220th Street, Long Beach, CA 90810, and has domestic regional processing centers in Long Beach and Bakersfield, California; Utica, New York; Oak Brook, Illinois; Aberdeen, South Dakota and Madison, Mississippi. The Guaranteed Loan Servicing Group is operated by XEROX-ES as an independent, third party education loan servicer with approximately 1,200 employees, providing full service loan origination and servicing for the Federal Stafford, PLUS and Consolidation education loan programs and many alternative/private loan programs. XEROX-ES and its predecessors have over 42 years of experience providing outsourcing services to higher education. As of October 2013, the Guaranteed Loan Servicing Group of XEROX-ES currently services approximately 3.2 million education loan accounts with loans valued at approximately $47 billion. XEROX-ES’ Guaranteed Loan Servicing Group services include Stafford, PLUS, Consolidation, and private/alternative loan servicing, as well as post-origination conversion and private loan origination. Origination services include receipt and validation of application data, underwriting (if required), school and borrower customer service and loan disbursement. A wide range of schools are supported, as well as a variety of different disbursement methods, including: check, master check, automated clearinghouse (ACH), and disbursement via national disbursing agents. Conversion services include set-up of new accounts to the servicing platform from the origination system or a lender’s system. This area also supports transfer of existing education loan portfolios from other servicers’ systems, as well as loan sales and securitizations. Loan servicing includes lender and borrower services, payment and transaction processing, due diligence activities as required by federal regulations or private/alternative loan program requirements, and 5 communications with schools, guarantors, the National Student Loan Clearing House, and others. In the event of borrower default, XEROX-ES prepares and submits a claim package on the lender’s behalf to the appropriate guaranty agency for review and guarantee payment, if applicable. Xerox files periodic reports with the Securities and Exchange Commission (the “SEC”) as required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Reports filed with the SEC are available for inspection without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Information as to the operation of the public reference facilities is available by calling the SEC at 1-800-SEC-0330. Information filed with the SEC can also be inspected at the SEC’s site on the World Wide Web at “http://www.sec.gov.” Xerox also currently provides information through Xerox’s website at “http://www.xerox.com.” Information filed by Xerox with the SEC or contained on Xerox’s website is not intended to be incorporated as part of this document and information contained on Xerox’s website is not a part of the documents that Xerox files with the SEC. Great Lakes Educational Loan Services, Inc. Great Lakes Educational Loan Services, Inc. (“GLELSI”) acts as a loan servicing agent for the Authority. GLELSI is a wholly owned subsidiary of Great Lakes Higher Education Corporation (“GLHEC”), a Wisconsin nonstock, nonprofit corporation. The primary operations center for GLHEC and its affiliates (including GLELSI) is in Madison, Wisconsin, which includes the data processing center and operational staff offices for both guaranty support services provided by GLELSI to GLHEC and third party guaranty agencies and lender servicing functions. GLHEC and affiliates also maintain offices in Eagan, Minnesota, Aberdeen, South Dakota, Rocky Hill, Connecticut and Boscobel and Eau Claire, Wisconsin and customer support staff located nationally. GLELSI began servicing loans for commercial lenders in 1977, first as a division of the Wisconsin Higher Education Corporation, subsequently renamed the Great Lakes Higher Education Corporation, then as GLELSI. In September, 2009, GLELSI began servicing loans for the U.S. Department of Education. GLELSI is presently one of four servicers who service loans issued to new student and parent borrowers under the Federal Direct Student Loan Program. As of September 30, 2013, GLELSI serviced 10,256,346 student and parental accounts with an outstanding balance of $174.7 billion for over 1,150 lenders nationwide, including the U.S. Department of Education. As of September 30, 2013, 65.8% of the portfolio serviced by GLELSI was in repayment status, 7.8% was in grace status and the remaining 26.4% was in interim status. GLELSI will provide a copy of GLHEC’s most recent consolidated financial statements on receipt of a written request directed to 2401 International Lane, Madison, Wisconsin 53704, Attention: Chief Financial Officer. Pennsylvania Higher Education Assistance Agency. The Pennsylvania Higher Education Assistance Agency (“PHEAA”) is a body corporate and politic constituting a public corporation and government instrumentality created pursuant to an act of the Pennsylvania Legislature. Under its enabling legislation, PHEAA is authorized to issue bonds or notes, with the approval of the Governor of the Commonwealth of Pennsylvania for the purpose of purchasing, making, or guaranteeing loans. Its enabling legislation also authorizes PHEAA to undertake the origination and servicing of loans made by PHEAA and others. PHEAA’s headquarters are located in Harrisburg, Pennsylvania with regional offices located throughout Pennsylvania. As of June 30, 2013, PHEAA had approximately 2,900 employees. PHEAA’s two principal servicing products are its full servicing operation (in which it performs all student loan servicing functions on behalf of its customers) and its remote servicing operation (in which it provides only data processing services to its customers that have their own servicing operations). As of June 30, 2013, PHEAA services approximately 9.0 million student borrowers representing an aggregate of approximately $200.1 billion outstanding principal amount for its full servicing customers which consist of national and regional banks and credit unions, secondary markets, and government entities, including $140.9 billion serviced for the Department of Education. Under PHEAA’s remote servicing operation, the remote clients service approximately 2.3 million student borrowers representing approximately $43.7 billion outstanding principal amount, including $33.1 billion owned by the Department of Education. 6 FFELP Net Reject Rate As a servicer, PHEAA works to minimize the net reject rate, which is the amount of claims submitted for payment that are rejected by the guarantor and are subsequently unable to be cured. The net reject rate for both the number and dollar value of loans for the last three calendar years is listed below. Year FFELP Net Reject Rate Loans Dollars 2012 0.021% 0.044% 2011 0.027% 0.016% 2010 0.005% 0.002% The net reject rate is calculated based on claims submitted three years prior which were unable to be cured during the three year cure period which ended during the calendar years noted above. The number and dollar value of rejected claims not cured is divided by the total claims filed during that same period three years prior. PHEAA’s most recent audited financial reports are available at www.pheaa.org. Sallie Mae, Inc. SLM Corporation is the largest holder, servicer and collector of loans made under the discontinued FFELP. SLM Corporation and its subsidiaries serve, as of September 30, 2013, over 25 million customers through SLM Corporation’s and its subsidiaries’ ownership and management of approximately $144.1 billion of student loans, of which approximately $106.4 billion, or approximately 74 percent, are federally insured. SMI is also the nation’s largest servicer of student loans, servicing a portfolio of approximately $301 billion principal balance of student loans as of September 30, 2013. Student Assistance Foundation, Inc. Student Assistance Foundation (“SAF”) acts as a loan servicing agent for the Authority. SAF is a Montana, nonprofit corporation. The primary operations center for SAF is in Helena, Montana, which includes the data processing center and operational staff offices for services provided by SAF to guaranty agencies and lender servicing. SAF and affiliated companies also maintain regional offices in Missoula, Bozeman, Butte, Great Falls, Miles City, Kalispell and Billings, Montana. Tru Student, Inc., a wholly owned subsidiary of the Student Assistance Foundation, provides lender servicing for FFELP Loans and Private Student Loans. As of October 31, 2013, SAF serviced 146,710 Student and parental loan borrowers with an outstanding balance of $3.036 billion for over 16 lenders nationwide. As of October 31, 2013, 98% of the portfolio serviced by SAF was in repayment status, 1% was in grace status and the remaining 1% was in interim status. SAF will provide a copy of its most recent consolidated financial statements on receipt of a written request directed to 2500 Broadway, Helena, Montana 59601, Attention: Chief Financial Officer THE GUARANTEE AGENCIES The Authority has requested information regarding the Guarantee Agencies from each Guarantor that guarantees greater than ten percent (10%) of all Student Loans in the Trust Estate (collectively, the “Significant Guarantors”). The following general information concerning each of the Significant Guarantors was supplied to the Authority by each Significant Guarantor and has not been verified by the Authority. The Authority makes no representation as to the accuracy or completeness of such information. 7 Great Lakes Higher Education Guaranty Corporation Great Lakes Higher Education Guaranty Corporation (“GLHEGC”) is a Wisconsin nonstock, nonprofit corporation the sole member of which is Great Lakes Higher Education Corporation (“GLHEC”). GLHEGC’s predecessor organization, GLHEC, was organized as a Wisconsin nonstock, nonprofit corporation and began guaranteeing student loans under the Higher Education Act in 1967. GLHEGC is the designated guaranty agency under the Higher Education Act for Wisconsin, Minnesota, Ohio, South Dakota, Puerto Rico and the Virgin Islands. On January 1, 2002, GLHEC (and GLHEGC directly and through its support services agreement with GLHEC), outsourced certain aspects of its student loan program guaranty support operations to Great Lakes Education Loan Services, Inc. (“GLELSI”). GLHEGC continues as the “guaranty agency” as defined in Section 435(j) of the Higher Education Act and continues its default aversion, claim purchase and compliance, collection support and federal reporting responsibilities as well as custody and responsibility for all revenues, expenses and assets related to that status. GLHEGC (through its support services agreement with GLHEC) also performs oversight of all direct and outsourced student loan program operations. The primary operations center for GLHEC and its affiliates (including GLHEGC and GLELSI) is in Madison, Wisconsin, which includes the data processing center and operational staff offices for both guaranty and servicing functions. GLHEC and affiliates also maintain offices in St. Paul, Minnesota, Aberdeen, South Dakota and Boscobel and Eau Claire, Wisconsin and customer support staff located nationally. GLHEGC will provide a copy of GLHEC’s most recent consolidated financial statements on receipt of a written request directed to 2401 International Lane, Madison, Wisconsin 53704, Attention: Chief Financial Officer. The information in the following tables has been provided to the Authority from reports provided by or to the U.S. Department of Education and has not been verified by the Issuer, GLHEGC or the initial purchasers. No representation is made by the Issuer, GLHEGC or the initial purchasers as to the accuracy or completeness of this information. Prospective investors may consult the U.S. Department of Education Data Books and Web sites http://www2.ed.gov/finaid/prof/resources/data/opeloanvol.html and http://www.fp.ed.gov/pubs.html for further information concerning GLHEGC or any other guaranty agency. Guaranty Volume. GLHEGC’s guaranty volume for each of the last five available federal fiscal years, including Stafford, Unsubsidized Stafford, SLS, PLUS, Graduate PLUS and Consolidation loan volume, was as follows: Federal Fiscal Year 2008 2009 2010 2011 2012 Guaranty Volume (Millions) 7,399.9 7,010.8 * * * * As of April 30, 2013, the U.S. Department of Education has not published the guaranty volume information for federal fiscal years 2010, 2011 and 2012. 8 Reserve Ratio. Following are GLHEGC’s reserve fund levels as calculated in accordance with 34 CFR 682.410(a)(10) for the last five federal fiscal years: Federal Fiscal Year 2008 2009 2010 2011 2012 Federal Guaranty Reserve Fund Level 1/ .76% .77% .93% .96% .97% The U.S. Department of Education’s website at http://www.fp.ed.gov/pubs.html has posted reserve ratios for GLHEGC for federal fiscal years 2008, 2009, 2010, 2011 and 2012 of .613%, .610%, .744%, .744% and .726% respectively. GLHEGC believes the Department of Education has not calculated the reserve ratio in accordance with the Act and the correct ratio should be .76%, .77%, .93%, .96% and .97% respectively, as shown above and as explained in the following footnote. On November 17, 2006, the U.S. Department of Education advised GLHEGC that beginning in Federal Fiscal Year 2006 it will publish reserve ratios that include loan loss provision and deferred revenues. GLHEGC believes this change more closely approximates the statutory calculation. According to the U.S. Department of Education, available cash reserves may not always be an accurate barometer of a guarantor’s financial health. 1/ In accordance with Section 428(c)(9) of the Higher Education Act, does not include loans transferred from the former Higher Education Assistance Foundation, Northstar Guarantee Inc., Ohio Student Aid Commission or Puerto Rico Higher Education Assistance Corporation. (The minimum reserve fund ratio under the Higher Education Act is .25%.) Claims Rate. For the past five federal fiscal years, GLHEGC’s claims rate has not exceeded 5%, and, as a result, the highest allowable reinsurance has been paid on all GLHEGC’s claims. The actual claims rates are as follows: Federal Fiscal Year 2008 2009 2010 2011 2012 Claims Rate 0.98% 1.34% 2.05% 1.59% 1.96% As a result of various statutory and regulatory changes over the past several years, historical rates may not be an accurate indicator of current delinquency or default trends or future claims rates. Pennsylvania Higher Education Assistance Agency Pennsylvania Higher Education Assistance Agency (“PHEAA”) is a body corporate and politic constituting a public corporation and government instrumentality created pursuant to the Pennsylvania Act of August 7, 1963, P.L. 549, as amended (the “Pennsylvania Act”). PHEAA has been guaranteeing student loans since 1964. As of June 30, 2013, PHEAA has 9 guaranteed a total of approximately $48.8 billion principal amount of Stafford Loans, $7.9 billion principal amount of PLUS and SLS Loans, and $52.1 billion principal amount of Consolidation Loans under the Higher Education Act. PHEAA initially guaranteed loans only to residents of the Commonwealth of Pennsylvania (the “Commonwealth”) or persons who planned to attend or were attending eligible education institutions in the Commonwealth. In May 1986, PHEAA began guaranteeing loans to borrowers who did not meet these residency requirements pursuant to its national guarantee program. Under the Pennsylvania Act, guarantee payments on loans under PHEAA’s national guarantee program may not be paid from funds appropriated by the Commonwealth. Effective April 1, 2013, PHEAA was designated as the guarantor for the State of Georgia. PHEAA accepted the transfer and assignment of the rights, duties and responsibilities as a Guaranty Agency under the Federal Family Education Loan Program from the Georgia Higher Education Assistance Corporation (GHEAC), the previous designated guarantor for the State of Georgia. As a result, PHEAA accepted the transfer and assignment of student loans with an aggregate of $687.8 million in original principal, net of cancellations. All percentages and results for PHEAA in the charts below for periods of activity after April 1, 2013 include the additional guaranty volume received in the transfer. PHEAA has adopted a default prevention program consisting of (i) informing new borrowers of the serious financial obligations incurred by them and stressing the financial and legal consequences of failure to meet all terms of the loan, (ii) working with institutions to make certain that student borrowers are enrolled in sound education programs and that the proper individual enrollment records are being maintained, (iii) assisting lenders with operational programs to ensure sound lending policies and procedures, (iv) maintaining up-to-date student status and address records of all borrowers in the guaranty program, (v) initiating prompt collection actions with borrowers who become delinquent on their loans, do not establish repayment schedules or “skip,” (vi) taking prompt action, including legal action and garnishment of wages, to collect on all defaulted loans, and (vii) adopting a general policy that no loan will be automatically “written off.” Since the loan servicing program was initiated in 1974, PHEAA has never exceeded an annual default claims percentage of 5 percent and, as a result, federal reimbursement for default claims has thus far been at the maximum federal reimbursement level. For the last five federal fiscal years (ending September 30), the annual default claims percentages have been as follows: Fiscal Year Annual Default Claims 2008 1.98 2009 1.95 2010 1.75 2011 1.54 2012 1.88 As of June 30, 2013, PHEAA had total federal reserve-fund assets of approximately $80.3 million. Through June 30, 2013, the outstanding amount of original principal on loans that had been directly guaranteed by PHEAA and transferred from GHEAC under the Federal Family Education Loan Program was approximately $38.3 billion. In addition, as of June 30, 2013, PHEAA had total assets of $8.8 billion, which does not include Federal Reserve Fund assets. Guarantee Volume. PHEAA’s guaranty volume (the approximate aggregate principal amount of 10 federally reinsured education loans, including PLUS Loans but excluding federal Consolidation Loans) was as follows for the last five federal fiscal years (ending September 30): Fiscal Year Guaranty Volume (Millions) 2008 3,948 2009 4,086 2010 913 2011 0 2012 0 Reserve Ratio. Under current law, PHEAA is required to manage the Federal Fund so net assets are greater than 0.25% of the original principal balance of outstanding guarantees. The table below shows the reserve ratio for PHEAA for the last five federal fiscal years (ending September 30): Fiscal Year Reserve Ratio 2008 0.25 2009 0.25 2010 0.44 2011 0.40 2012 0.35 11 Recovery Rates. A guarantor’s recovery rate, which provides a measure of the effectiveness of the collection efforts against defaulting borrowers after the guarantee claim has been satisfied, is determined for each year by dividing the current year collections by the total outstanding claim portfolio for the prior fiscal year. The table displays PHEAA’s calculation of the ratio on a regulatory basis of accounting. In addition to gain contingencies not recognized under generally accepted accounting principles, the FY 2010 reserve ratio includes an adjustment related to foregoing the transfer of default aversion fees from the Federal Reserve Fund to the Agency Operating Fund as agreed to in our management plan approved by the Department of Education on May 22, 2007. The table below shows the cumulative recovery rates for PHEAA for the five federal fiscal years (ending September 30): Fiscal Year Recovery Rates 2008 32.81 2009 29.32 2010 32.28 2011 31.50 2012 30.98 American Student Assistance. Massachusetts Higher Education Assistance Corporation, doing business as American Student Assistance (“ASA”), a not-for-profit corporation organized in 1956, will guarantee a portion of the Financed Student Loans. ASA is one of the oldest and largest guaranty agencies in the United States, and is the designated guarantor for the Commonwealth of Massachusetts and the District of Columbia. Since 1956, ASA has been a provider of higher education financing products and services to students, parents, schools and lenders across the country. ASA guarantees more than $35 billion in outstanding (non-ASA held) loans as of June 30, 2012. Originally created by the General Court of the Commonwealth of Massachusetts as Massachusetts Higher Education Assistance Corporation, ASA currently acts on behalf of the U.S. Department of Education to ensure that the public policy purposes and regulatory requirements of the FFEL Program are met. ASA has its principal offices located at 100 Cambridge Street, Boston, MA 02114. Guaranty Volume. The following table sets forth the original principal amount of FFEL Program Loans (excluding Consolidation Loans) guaranteed by ASA in each of its last five fiscal years: ASA Fiscal Year (Ending June 30) Net FFEL Program Loans Guaranteed by ASA (Dollars in Millions) 2008 2009 2010 2011 2012 $ 2,711 1,956 1,601 -21 -1 12 The information in the following tables has been provided by ASA from reports provided by or to the U.S. Department of Education. No representation is made by ASA as to the accuracy or completeness of the information. Recovery Rates. A Guarantee Agency’s recovery rate, which provides a measure of the effectiveness of the collection efforts against defaulting borrowers after the guarantee claim has been satisfied, is determined by dividing the aggregate amount recovered from borrowers by the aggregate amount of default claims paid by the Guarantee Agency. The table below sets forth the recovery rates for ASA as taken from the U.S. Department of Education Guarantee Agency Financial Report form 2000, for each of the last five federal fiscal years: Federal Fiscal Year (Ending September 30) 2008 2009 2010 2011 2012 Cumulative Recovery Rate 60.3% 55.3 56.1 63.1 70.1 Reserve Ratio. A Guarantee Agency’s reserve ratio is determined by dividing the sum of its Federal Reserve Fund balance plus certain allowances and other non-cash charges by the original principal amount of loans outstanding. ASA’s reserve ratio for the last five federal fiscal years ending September 30 is as follows: Federal Fiscal Year (Ending September 30) 2008 2009 2010 2011 2012 Reserve Ratio 0.125% 0.252 0.297 0.241 0.254 Claims Rate. ASA’s claims rate represents the percentage of loans in repayment at the beginning of a federal fiscal year which defaulted during the ensuing federal fiscal year, net of repurchases, refunds and rehabilitations. For the federal fiscal years 2008-2012, ASA’s claims rate has not exceeded 5%, and as a result, all claims of ASA have been fully reimbursed at the maximum allowable level by the U.S. Department of Education. See the description or summary of the FFEL Program herein for more detailed information concerning the FFEL Program. Nevertheless, there can be no assurance the Guarantee Agencies will continue to receive full reimbursement for such claims. The following table sets forth the claims rate of ASA for the last five federal fiscal years: Federal Fiscal Year (Ending September 30) 2008 2009 2010 2011 2012 Claims Rate 2.1% 2.0 2.0 1.7 1.5 13 Net Loan Default Claims. The following table sets forth the dollar value of default claims paid, net of repurchases, refunds and rehabilitations for the last five ASA fiscal years. ASA Fiscal Year (Ending June 30) 2008 2009 2010 2011 2012 Default Claims (Dollars in Millions) $ 672 830 764 683 593 Default Recoveries. The following table sets forth the amount of recoveries returned to the U.S. Department of Education for the last five ASA fiscal years. ASA Fiscal Year (Ending June 30) 2008 2009 2010 2011 2012 Default Recoveries (Dollars in Millions) $ 171 184 344 459 512 14 Appendix A Audited Financial Statements of the Authority 15 FINANCIAL STATEMENTS Brazos Higher Education Authority, Inc. Years Ended June 30, 2013 and 2012 With Report of Independent Auditors Ernst & Young LLP Brazos Higher Education Authority, Inc. Financial Statements Years Ended June 30, 2013 and 2012 Contents Report of Independent Auditors.......................................................................................................1 Financial Statements Balance Sheets .................................................................................................................................3 Statements of Changes in Fund Balance..........................................................................................4 Statements of Cash Flows ................................................................................................................5 Notes to Financial Statements ..........................................................................................................6 1307-1107914 Ernst & Young LLP Suite 1800 401 Congress Avenue Austin, TX 78701 Tel: +1 512 478 9881 Fax: +1 512 473 3499 www.ey.com Report of Independent Auditors The Board of Directors Brazos Higher Education Authority, Inc. We have audited the accompanying financial statements of Brazos Higher Education Authority, Inc., which comprise the balance sheets as of June 30, 2013 and 2012, and the related statements of changes in fund balance, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 1307-1107914 A member firm of Ernst & Young Global Limited Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Brazos Higher Education Authority, Inc. at June 30, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued our report dated October 28, 2013, on our consideration of the Authority’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. ey October 28, 2013 1307-1107914 2 Brazos Higher Education Authority, Inc. Balance Sheets (In Thousands) June 30 Assets Cash and short-term investments Interest receivable: Student loan notes receivable, net Investments Student loan notes receivable, net Deferred debt issue costs Other assets Total assets Liabilities and fund balance Liabilities: Bonds and notes payable, net Accrued interest payable Department of Education fees payable Other payable Administrative and loan servicing fees payable Affiliate accounts payable Fund balance: Restricted Unrestricted Total liabilities and fund balance $ 2013 2012 149,953 $ 223,782 92,199 74,224 2 3 7,356,363 6,511,261 15,772 13,634 61 82 $ 6,749,157 $ 7,688,179 $ 6,577,522 $ 7,559,268 7,387 6,355 5,087 4,614 1,216 – 1,219 892 39 37 7,574,216 6,589,420 118,857 164,258 (4,894) (4,521) 113,963 159,737 $ 7,688,179 $ 6,749,157 See accompanying notes. 1307-1107914 3 Brazos Higher Education Authority, Inc. Statements of Changes in Fund Balance (In Thousands) Year Ended June 30 2013 2012 Interest income: Student loan notes receivable, net Investments $ Interest expense: Bonds payable Arbitrage and excess interest Net interest income before provision for loan losses Provision for loan losses Net interest income after provision for loan losses Noninterest income: Derivative fair value adjustment Other Noninterest expense: Administrative and loan servicing fees Auction agent and broker-dealer fees Amortization of debt issue costs Other Revenue over expenses before estate contribution Estate contribution Fund balance, beginning of year Fund balance, end of year $ 137,440 $ 33 137,473 149,985 218 150,203 66,152 40 66,192 93,855 1,216 95,071 71,281 (1,972) 69,309 55,132 (2,386) 52,746 – 2,431 2,431 12,191 1,789 13,980 22,867 55 2,138 1,092 26,152 26,548 132 1,777 1,258 29,715 45,588 186 113,963 159,737 $ 37,011 10 76,942 113,963 See accompanying notes. 1307-1107914 4 Brazos Higher Education Authority, Inc. Statements of Cash Flows (In Thousands) Year Ended June 30 2013 2012 Operating activities Revenue over expenses before estate contribution Adjustments to reconcile revenue over expenses before estate contribution to net cash used in operating activities: Student loan interest capitalized Amortization of loan purchase premiums Amortization of bond discount Amortization of debt issue costs Provision for loan losses Derivative market value adjustment Changes in assets and liabilities: Decrease (increase) in assets: Interest receivable Other assets Increase (decrease) in liabilities: Accrued interest payable Administrative and loan servicing fees payable Other payable Affiliate accounts payable Department of Education fees payable Net cash used in operating activities $ Investing activities Principal collected on student loan notes receivable Proceeds from sale of student loan notes receivable Purchase of student loan notes receivable Net cash provided by investing activities Financing activities Proceeds from issuance of bonds and notes payable, net Repayment of bonds payable Estate contributions Net cash used in financing activities Net change in cash and short-term investments Cash and short-term investments, beginning of year Cash and short-term investments, end of year Supplemental disclosure of cash and noncash items Cash paid during the year for interest 45,588 $ 37,011 (86,240) 19,754 (6,656) 2,138 1,972 – (110,428) 31,077 (2,278) 1,777 2,386 (12,191) 17,974 (21) 21,957 (61) (1,032) (327) (1,216) (2) (473) (8,541) 3,055 (101) 1,188 (51) (435) (27,094) 942,422 623 (33,429) 909,616 937,827 990 (22,782) 916,035 1,256 (976,346) 186 (974,904) – (833,074) 10 (833,064) $ (73,829) 223,782 149,953 $ 55,877 167,905 223,782 $ 73,839 $ 93,078 See accompanying notes. 1307-1107914 5 Brazos Higher Education Authority, Inc. Notes to Financial Statements (Dollars in Thousands) June 30, 2013 1. Organization Brazos Higher Education Authority, Inc. (the Authority) is a Texas not-for-profit public benefit corporation, which was incorporated in May 1975 for the purpose of providing funds for the acquisition and servicing of student loans that are insured by the U.S. Department of Education (DOE) and guaranteed by various national guarantors under the Federal Family Education Loan Program (FFELP) as provided for in the Higher Education Act of 1965, as amended. To maintain such insurance and guarantee of student loans, the Authority must comply with the servicing, collecting, accounting, and reporting requirements of the FFELP. The Authority has contracted with Brazos Higher Education Service Corporation, Inc. (BHESC) to serve as master servicer. BHESC has contracted with various subservicers for loan servicing duties. Funding for the Authority has been provided by financial institutions through the issuance of asset-backed bonds and, periodically, by advances from affiliates. The Authority’s primary source of revenue is interest on student loans and investment income. All borrowings on the bonds payable are expected to be repaid solely from funds derived from student loan principal repayments, interest, special allowance payments, interest subsidy payments, guarantee payments on defaulted notes, proceeds from sales of student loan notes, and investment income. Interest Rate Environment The Authority’s student bond payable portfolio is composed of $982 million of Auction Rate Securities (ARS) and $5.59 billion of London Interbank Offered Rate (LIBOR) based Floating Rate Notes (FRN) as of June 30, 2013. In February 2008, an imbalance of supply and demand in the ARS market as a whole led to failures of the auctions pursuant to which certain of the Authority’s ARS interest rates are set. The failed auctions have continued through 2013. As a result, at June 30, 2013, $982 million of the Authority’s ARSs bore interest at the maximum rate allowable under the indenture estate provisions that govern the determination of the interest rate in the event of a failed auction. The Authority’s $982 million of taxable ARSs have provisions, which, during a period of auction failure, limit the interest rate on the ARSs to the lesser of the Maximum Rate or the Net Loan Rate. The Authority’s Maximum Rate applied to taxable ARSs is defined as the lesser of the 30-day LIBOR plus 150 basis points for senior debt and 30-day LIBOR plus 250 basis points for subordinate debt. Each of the individual indenture estates within the Authority has provisions for calculation of a Net Loan Rate for taxable ARS. 1307-1107914 6 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 1. Organization (continued) The Net Loan Rate, discussed above, is intended to protect each indenture estate from incurring cash outflows that the cash inflows cannot sustain. The Net Loan Rates of the Authority’s respective indenture estates currently range from 1.93% to 1.97%. During 2013, the Net Loan Rate was invoked for most ARS taxable bond issues. The market disruption experienced in the ARS market, discussed above, did not have a significant impact upon the Authority’s FRNs, primarily because the Authority’s FRNs reset quarterly. The FRNs are fixed for three months; therefore, spreads on student loans financed with FRNs are generally not affected to the extent of those financed with ARS notes. The Authority has refinanced the majority of its ARS notes. See Note 5. 2. Significant Accounting Policies Basis of Presentation The financial statements have been prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States. The accounts of the Authority are maintained in accordance with the principles of fund accounting in compliance with the debt instruments. This is a system under which resources are classified for accounting purposes into funds established for specific purposes. The Authority aggregates its funds into general groups by the source of funding. The fund balance related to specific financing is restricted by the bond agreements and, as such, is shown as restricted on the balance sheets. The non-debt-related fund balance, if any, is shown as unrestricted on the balance sheets. 1307-1107914 7 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 2. Significant Accounting Policies (continued) Affiliated Entities The Authority is affiliated with the following entities: • Brazos Student Finance Corporation (BSFC) • Bosque Higher Education Authority, Inc. (Bosque) • Federated Student Finance Corporation (FSFC) • Acapita Education Finance Corporation (AEFC) • Brazos Higher Education Service Corporation, Inc. (BHESC) • Leon Higher Education Authority, Inc. (LEON) • Brazos Education Loan Authority, Inc. (BELA) All of the entities operate in the student loan higher education industry and are controlled by common officers and directors with the ability to influence the business performed by each entity. BHESC provides facilities for headquarters and administrative support and performs marketing, accounting, servicing, and collection duties on a contractual basis at an agreed-upon rate. BHESC also provides loan sales, marketing, and transfer services for the Authority for which the Authority reimburses BHESC. Debt Issue Costs and Bond Discount The Authority capitalizes debt issue costs incurred when issuing debt. Debt issue costs include costs related directly to the issuance of bonds payable and consist primarily of filing fees, trustee fees and expenses, document reproduction costs, legal fees, costs of credit ratings, underwriter’s fees, and other costs. The Authority also issues bonds at a discount and records the discount as an adjustment to bonds payable, net, on the balance sheet. Debt issue costs and bond discounts are amortized over the terms of the bonds using a method that approximates the effective interest method. The amortization of the bond discount is included within interest expense on bonds payable in the statements of changes in fund balance. 1307-1107914 8 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 2. Significant Accounting Policies (continued) Interest Receivable Interest receivable on student loan notes receivable includes special allowance payments receivable from or payable to the DOE, government subsidy interest, and borrower interest on all student loans outstanding. Cash and Short-Term Investments Cash and short-term investments consist of demand deposits in banks, money market funds, guaranteed investment contracts, and repurchase agreements with original maturities of 90 days or less. Cash and short-term investments are held in indenture with U.S. Bank, N.A. (collectively, the Trustee) under various indentures, subject to certain limitations (see Note 2 – Trustees), and are pledged to secure related bonds payable. Guaranteed investment contracts are stated at fair value and represent unsecured investments. Repurchase agreements are stated at fair value and are fully collateralized by underlying securities. Any realized or unrealized changes in fair value are recorded through the statements of changes in fund balance. Interest income from these investments is recorded on an accrual basis. Cash and short-term investments comprise the following: June 30 Cash – demand deposits Repurchase agreements Money market funds Total cash and short-term investments $ $ 2013 2012 81 $ 507 149,365 149,953 $ 80 507 223,195 223,782 As of June 30, 2013 and 2012, the Authority had $33,781 and $38,303, respectively, in cash and short-term investment reserves in compliance with the bond indenture requirements. 1307-1107914 9 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 2. Significant Accounting Policies (continued) Student Loan Notes Receivable Student loans are stated at the principal amount outstanding, plus unamortized purchase premiums, transfer fees, and contingent borrower benefits, net of the allowance for loan losses. All student loan notes receivable are pledged to secure related bonds payable. Premiums on Loans Purchased The Authority defers premiums paid on those student loan notes purchased and that secure long-term financings, and amortizes such premiums over the estimated life of the student loan notes as an adjustment to the yield of the related loans utilizing a method that approximates the effective interest rate method. Amortization of the premiums is included within the statements of changes in fund balance in interest on student loan notes receivable, net, and was $15,849 and $29,082 for the years ended June 30, 2013 and 2012, respectively. Included on the balance sheets within the student loan notes receivable net balance is $101,239 and $117,088 at June 30, 2013 and 2012, respectively, of unamortized loan purchase premiums. Income Taxes The Authority is a not-for-profit public benefit corporation that is exempt from federal income taxes under Section 501(a) of the Internal Revenue Code as an organization described in Section 501(c)(3). The Authority is also exempt from state income tax. Income that is not related to its exempt purposes, less applicable deductions, is subject to federal income taxes. The Authority had no net unrelated business income for the years ended June 30, 2013 or 2012. As such, no provision for federal or state income taxes has been provided in the accompanying financial statements. The Authority files federal information returns in the United States. The Authority may be subject to examinations for the tax years ended June 30, 2010, and later by the Internal Revenue Service (IRS). The Authority is not currently under examination for any open tax year. The Authority follows the accounting standard related to the accounting for uncertainty in income taxes recognized in the Authority’s financial statements. The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Authority currently does not have any uncertain tax positions. 1307-1107914 10 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 2. Significant Accounting Policies (continued) Trustees The Authority contracts certain services to trustees. Trustees hold the pledged student loan notes receivable and other invested assets in the Authority’s name and invest and disburse funds as directed by the Authority pursuant to the requirements of the indenture and bond agreements. The Trustees also monitor the invested assets of the Authority and the related cash flows of the loans and other assets pledged under the indenture to secure the related debt. Concentration Risk The Authority’s credit risk is inherent principally in its student loan notes receivable. It is impossible to predict the status of the economy or unemployment levels or at which point the economy will improve, thereby significantly decreasing the Authority’s credit risk exposure. However, the credit risk of the Authority is substantially decreased by the guaranteed nature of its investments in student loan notes receivable. Additionally, at June 30, 2013, 100% of the portfolio is FFELP loans. Any changes in legislation related to existing FFELP or consolidation loans could have a significant impact on the Authority. Student Loan Income The Authority recognizes interest income on student loans as earned, net of amortization of premiums and DOE rebate fees paid. Additionally, income is recognized based upon the principal amount outstanding in accordance with the terms of the applicable loan agreement until the outstanding balance is paid or charged off, after giving effect to estimates for borrower utilization of borrower benefit incentives for making timely loan payments. Included in interest income is $53,620 and $60,708 in special allowance rebates during the years ended June 30, 2013 and 2012, respectively. Interest Expense Interest expense is based upon contractual interest rates (variable) adjusted for the amortization of bond discount costs. 1307-1107914 11 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 2. Significant Accounting Policies (continued) Department of Education Fees Approximately 80% of the student loan notes receivable portfolio is consolidation loans, on which the Authority pays fees to the DOE. DOE fees consist of rebate fees due to the DOE. Rebate fees are monthly fees assessed by the DOE on the outstanding consolidation loan balance at the end of the month. Rebate fees are accounted for as an adjustment to the yield on student loan notes receivable included within the statements of changes in fund balance in interest on student loan notes receivable, net, and were $57,701 and $63,661 for the years ended June 30, 2013 and 2012, respectively. Estimates in Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Key accounting policies that include significant judgments and estimates include the provision for loan losses and derivative accounting. 3. Interest Receivable on Student Loan Notes Receivable FFELP loans obligate the borrower to either pay interest at a stated fixed rate or an annually reset variable rate that has a cap depending on when the loan was originated. The interest earned by the Authority is dependent upon the borrower’s interest rate, the date the loan was originated, and the Special Allowance Payment formula. The Special Allowance Payment formula, or SAP rate, is determined by the DOE, based upon an average of all of the applicable floating rates (91-day Treasury bill, commercial paper, and 52-week Treasury bill) in a calendar quarter, plus a spread of between 1.74% and 3.50%, depending on the underlying loan status and origination date. These rates are then applied to the quarterly average daily balance for loans eligible to receive SAP. 1307-1107914 12 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 3. Interest Receivable on Student Loan Notes Receivable (continued) For loans first disbursed prior to April 1, 2006, the Authority earns interest at the higher of the borrower’s rate or the SAP rate. If the SAP rate exceeds the borrower’s rate, the DOE makes a payment directly to the Authority. For loans first disbursed after April 1, 2006, the Authority earns interest at the SAP rate. If the SAP rate is less than the borrower’s rate, the Authority “rebates” the difference between the borrower’s rate and the lower SAP rate to the DOE. If the SAP rate is greater than the borrower’s rate, the DOE makes SAP payments to the Authority for the difference between the two rates. Prior to October 30, 2004, the DOE guaranteed a minimum yield of 9.5% (9.5% SAP Floor) in connection with loans made from proceeds of certain tax-exempt bonds. On October 30, 2004, President Bush signed the Taxpayer-Teacher Protection Act of 2004 (the October 30 Act), a new law that amended the Higher Education Act of 1965 (HEA). The October 30 Act restricts the situations in which lenders are entitled to the 9.5% SAP Floor in connection with loans made from the proceeds of certain tax-exempt bonds. Specifically, the DOE will no longer guarantee payment of the 9.5% SAP Floor for a loan financed with qualifying tax-exempt bonds if (1) the underlying bond matures, is retired, is defeased, or is refunded or (2) if the loan is refinanced with funds obtained from certain bonds or is sold or transferred to another holder. The October 30 Act was extended as part of the reauthorization of the HEA. On January 24, 2007, the DOE issued a letter that provides its interpretation of the Higher Education Act of 1965, as amended, and the DOE’s regulations that control eligibility for SAP at the 9.5% SAP Floor; in effect, this interpretation defines those loans that it believes are eligible for SAP at the 9.5% SAP Floor. The DOE suspended payment of claims for SAP at the 9.5% SAP Floor rate beginning with the quarter ended September 30, 2006. Since the issuance of the DOE’s interpretation, the Authority has not claimed amounts previously considered eligible for the 9.5% SAP Floor. At June 30, 2013, student loans held by the Authority had stated interest rates determined annually by the DOE ranging from 1.79% to 8.50% and are generally payable by the borrower following a specified grace period. Effective July 1, 2013, the DOE reset these rates to range from 1.75% to 8.50%. For FFELP loans, the U.S. government pays the Authority the interest on subsidized student loans from the date of acquisition until the end of the grace period as defined in the regulations. 1307-1107914 13 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 3. Interest Receivable on Student Loan Notes Receivable (continued) Under certain conditions, the Authority may capitalize accrued interest receivable and add it to the borrower’s outstanding principal. For unsubsidized FFELP student loans, the borrower has the option of either paying the interest or having accrued interest capitalized from the date of the loan origination until the end of the grace period and during periods of deferment. Borrowers of both subsidized and unsubsidized FFELP student loans have the option of having accrued interest capitalized during periods of forbearance. Subsequent interest accrues on the new total principal balance that includes any capitalized interest. Interest receivable on student loan notes receivable consists of the following: June 30 2013 Student loan interest receivable Interest subsidy receivable Special allowance payable Interest receivable on student loan notes receivable $ $ 82,508 $ 4,714 (12,998) 74,224 $ 2012 100,771 6,011 (14,583) 92,199 4. Student Loan Notes Receivable Student loan notes are purchased by the Authority primarily from affiliates. The Authority’s student loan portfolio consists solely of loans originated under the FFELP federally sponsored student loan program. 1307-1107914 14 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 4. Student Loan Notes Receivable (continued) Total student loan notes receivable consist of the following: June 30 2013 FFELP student loan notes receivable Deferred loan premiums and transfer fees, net of accumulated amortization Allowance for student loan losses Student loan notes receivable, net 2012 $ 6,405,671 $ 7,232,153 130,556 110,802 7,362,709 6,516,473 (6,346) (5,212) $ 6,511,261 $ 7,356,363 The Authority purchased $1,382,962 of affiliate student loan notes receivable in a series of refinancing transactions during 2012 (see Note 5). Loan Programs The FFELP includes the Federal Stafford Loan (Stafford) Program, the Federal Supplemental Loans for Students (SLS) Program, the Federal Parent Loan for Undergraduate Students (PLUS) Program, the Federal Parent Loan for Graduate Students (GradPLUS) Program, and the Federal Consolidation Loan Program. These loan programs are available to students or parents of students who, when the loans were originated, were enrolled in postsecondary institutions. Stafford, SLS, GradPLUS, and PLUS loans have repayment periods ranging from between 5 and 10 years. Federal consolidation loans have repayment periods of 12 to 30 years. Repayment on these loans commences subsequent to a grace period following the student’s graduation. All FFELP loans held by the Authority have been either insured or guaranteed by the U.S. government, Texas Guaranteed Student Loan Corporation (TGSLC), or other national guarantors, provided applicable program requirements have been met by the original lender, prior servicer, and the current servicing agent with respect to such loans. The original lenders have warranted to the Authority that the student loans have met these requirements and are valid obligations of the borrowers. Student loan notes that do not conform to the terms of the purchase 1307-1107914 15 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 4. Student Loan Notes Receivable (continued) agreement between the individual entities and the original lender may be returned to the original lending institution for reimbursement of principal, interest, and costs incurred while held by the individual entities. In the event of default on a student loan due to borrower default, death, disability, or bankruptcy, the Authority files a claim with the insurer or guarantor of the loan. The Authority will receive the unpaid principal balance and accrued interest on the loan less any risk sharing, if applicable, provided the loan has been properly originated and serviced. Student Loan Servicing BHESC provides the Authority with the necessary student loan servicing to maintain compliance with the requirements of the FFELP loan program by holding subservicing agreements for loan servicing duties with various student loan servicing agents. BHESC holds subservicing agreements for loan servicing duties with Affiliated Computer Services; American Education Services; Great Lakes Educational Loan Services, Inc.; Student Assistance Foundation of Montana; and Sallie Mae Servicing Corporation on behalf of affiliated entities. Under the terms of these subservicing agreements, the subservicer indemnifies the Authority for any loss of principal and interest resulting from deficiencies in the loan servicing performed by the subservicer. At June 30, 2013, 100% of the loan portfolio is serviced by third-party subservicers. Transfer Fees The Authority defers transfer fees paid to BHESC for the performance of various general and administrative transfer services, estimated brokerage-related equivalent fees for BHESC employee services provided in the student loan origination process, and the performance of legal services related to the transfer of student loans. These transfer fees approximate 0.30% to 0.60% of the principal amount of the loans transferred. The Authority amortizes such fees over the estimated life of the student loan notes as an adjustment to the yield of the related loans utilizing a method that approximates the effective interest rate method. Amortization of the fees is included in the statements of changes in fund balance as a reduction of interest on student loan notes receivable, net. For the years ended June 30, 2013 and 2012, $3,013 and $1,995, 1307-1107914 16 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 4. Student Loan Notes Receivable (continued) respectively, is included as amortization of purchase premiums. Included in unamortized purchase premiums were $9,563 and $12,576 at June 30, 2013 and 2012, respectively, of unamortized transfer fees. Beginning in fiscal year 2008, BHESC discontinued charging transfer fees. The transfer fees currently capitalized will continue to be amortized over the life of the loans. Allowance for Student Loan Losses The Budget Reconciliation Act of 1993 (the Act) lowered the federal guarantee for FFELP student loans made on or after October 1, 1993, to 98%. The Deficit Reduction Act of 2006 lowered the federal guarantee for FFELP student loans made on or after July 1, 2006, to 97%. The Authority provides an allowance for estimated loss of guaranteed student loan principal and interest related to the 98% guarantee limitation and unrecoverable amounts due to servicing deficiencies on student loan notes receivable. The Act’s lowering of the federal guarantee has not historically had a material impact on the Authority. The Authority determines the allowance for loan losses based on loss factors applied to the portion of student loan balances without guarantees by individual loan type and status. Because the Authority’s portfolio consists of guarantees ranging from 97% to 99%, and because there is a relatively small percentage of loans at the 97% guarantee, management has considered that 98% of principal and interest is guaranteed and there is only 2% of principal with credit risk. Activity in the allowance for loan losses is summarized as follows: June 30 2013 Balance, beginning of year Provision for loan losses Charge-offs, net of recoveries Balance, end of year 1307-1107914 $ $ 6,346 $ 1,972 (3,106) 5,212 $ 2012 6,838 2,386 (2,878) 6,346 17 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 5. Bonds Payable, Net Bonds payable consist of the following: June 30 2013 Student Loan Revenue Bonds Series 2004: Series I-A-1 through I-A-2 Series I-A-3 through I-A-5 and I-B-1 Student Loan Revenue Bonds Series 2005: Series I-A-1 through I-A-4 Series I-A-5 through I-A-7 and I-B-1 1307-1107914 $ 2012 Final Maturity Date 95,473 $ 168,215 September 2013 through June 2022 70,000 496,100 33,000 70,000 December 2039 543,200 September 2016 through March 2029 33,000 June 2041 18 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 5. Bonds Payable, Net (continued) June 30 2013 Student Loan Revenue Bonds Series 2005: Series I-A-8 through I-A-12 Series I-B-2 2012 $ 769,510 $ 858,113 Final Maturity Date June 2014 through March 2023 69,100 69,100 June 2042 405,275 478,954 September 2020 through March 2026 50,000 50,000 June 2042 274,935 359,352 March 2022 through December 2024 50,000 50,000 June 2042 Student Loan Revenue Bonds Series 2006: Series I-A-9 through I-A-10 449,402 499,298 December 2024 through June 2026 Series I-A-11 through I-A-15 and I-B-2 209,700 209,700 June 2042 Student Loan Revenue Bonds Series 2005: Series I-A-13 through I-A-16 Series I-B-3 Student Loan Revenue Bonds Series 2006: Series I-A-1 through I-A-3 Series I-A-4 through I-A-8 and I-B-1 1307-1107914 19 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 5. Bonds Payable, Net (continued) June 30 2013 Student Loan Revenue Bonds Series 2007: Series I-A-1 through I-A-5 and I-B-1 2012 $ 500,000 $ 500,000 Final Maturity Date June 2043 Student Loan Revenue Bond Series 2010: A-1 through A-2 and B-1 through B-3 832,778 991,721 February 2029 through February 2041 Student Loan Revenue Bond Series 2011: A-1 through A-3 and B-1 through B-5 1,157,920 1,364,579 February 2020 through February 2047 Student Loan Revenue Bond Series 2011: II-A-1 through II-A-3 and II-B-1 and II-C-1 1,104,413 1,298,161 January 2020 through July 2045 Note payable to BHESC Unamortized bond premium 1307-1107914 3,500 4,197 6,571,803 7,546,893 12,375 5,719 $6,577,522 $7,559,268 20 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 5. Bonds Payable, Net (continued) Interest rates for the various bond series are based on fixed and variable rates. The interest rates at June 30, 2013, for each class of bonds are as follows: Floating rate securities Taxable auction rate securities 3-month LIBOR plus spread varying from 0.02%–1.25% Set at auction 0.28%–1.73% 1.67%–1.98% The auction rates, when auctions are functioning, are determined every 7, 28, or 35 days depending on the auction procedures described in the indenture agreement. The interest rates may be converted to variable or fixed rates by the Authority within the guidelines established by the indenture agreements. Pursuant to the individual indenture agreement for each debt instrument, the respective bond issues are secured solely by those student loans and other invested assets held by each individual bond issue’s indenture estate. Pursuant to the indenture and bond agreements, the Authority is subject to certain financial and nonfinancial covenants. Under the bond agreements, the Authority has certain minimum collateral coverage requirements. Under the indenture covenants, the Authority must make timely principal and interest payments or the bonds will default. The Authority was in compliance with financial and nonfinancial debt covenants at June 30, 2013. The maturities of bonds payable as of June 30, 2013, by fiscal year, are as follows: 2014 2015 2016 2017 2018 Thereafter $ 244,781 206,249 189,803 178,239 115,327 5,637,404 $ 6,571,803 The actual maturities of bonds payable may differ from the contractual maturities noted above, as the Authority has the ability to prepay the debt outstanding. 1307-1107914 21 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 6. Derivative Financial Instruments and Hedging Activities In prior years, the Authority entered into an interest rate contract in order to manage interest rate exposure. This interest rate swap agreement effectively modifies the Authority’s exposure to interest rate risk by converting a portion of the Authority’s variable rate LIBOR-based bonds payable to variable rate commercial paper-based bonds payable. The Authority has not elected hedge accounting as allowed under the applicable guidance to account for this contract. The notional amount of this interest rate swap is $250,000. The estimated fair value of this interest rate swap was $0 liability at June 30, 2013 and 2012. There was a $12,191 positive effect on income related to the derivative market value adjustment for the year ended June 30, 2012. The interest rate swap matured in June 2012. 7. Fair Value of Financial Instruments At June 30, the estimated fair values of the Authority’s financial instruments are as follows: 2013 Carrying Amount Financial assets: Cash and short-term investments Student loan notes receivable, net Financial liabilities: Bonds payable, net 1307-1107914 $ 149,953 $ 2012 Fair Value 149,953 $ Carrying Amount 223,195 $ Fair Value 223,195 6,511,261 6,400,459 7,356,363 7,232,153 6,577,522 6,571,803 7,559,268 7,431,632 22 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 7. Fair Value of Financial Instruments (continued) The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash – The fair value of cash approximates the carrying amount. Student Loan Notes Receivable, Net – The fair value of student loan notes receivable was determined based on discounted cash flow models. Bonds Payable, Net – The fair value of the bonds payable is based on the discounted value of the future cash flows using current rates for similar bonds. Interest Rate Swaps – The estimated fair value of interest rate swap agreements is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services. 8. Fair Value Measurements The applicable accounting guidance on fair value measurements defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and enhances disclosures about fair value measurements. Fair value is defined by the accounting standard as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: • Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liabilities (such as interest rates, volatilities, prepayment speeds, or credit risks; or inputs that are derived principally from or corroborated by market data, correlation, or other means. 1307-1107914 23 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 8. Fair Value Measurements (continued) • Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Authority’s financial assets and financial liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Authority’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Authority’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Authority’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Repurchase Agreements and Money Market Funds Repurchase agreements, guaranteed investment contracts, and money market funds are reported at fair value utilizing Level 2 inputs. The Authority obtains quoted prices of identical assets from financial institutions; however, the market in which these assets trade is not considered active. 1307-1107914 24 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 8. Fair Value Measurements (continued) The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value: Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value 2013 Repurchase agreements, money market funds $ – $ 149,872 $ – $ 149,872 2012 Repurchase agreements, money market funds $ – $ 223,702 $ – $ 223,702 9. Commitments and Contingencies In April 2012, the IRS issued Announcement 2012-14, TEB Voluntary Closing Agreement Program (VCAP): Relief from Allocation and Accounting Errors for Certain Issuers for Tax-Exempt Student Loan Bonds. This pronouncement alleges that issuers of tax-exempt student loan bonds inappropriately allocated student loans as collateral against these bonds. The IRS has taken a position contrary to industry standards concerning the use of these bond proceeds. The Authority utilized these proceeds in accordance with attorney opinions and industry practices. The VCAP allows for voluntary correction of these alleged errors. The correction allows for the payment of 40% of the total potential tax liability. Any company subject to the VCAP must submit an offer of settlement amount to the IRS by July 31, 2012, or incur a full examination of the program. The Authority has performed the calculation and submitted a $1,216 settlement offer to the IRS. As of the issuance of these financial statements, the IRS has not responded to this offer. Should the IRS reject the offer, the Authority could be subject to an IRS examination. It is indeterminable at this time what, if any, liability would occur under an examination. 1307-1107914 25 Brazos Higher Education Authority, Inc. Notes to Financial Statements (continued) (Dollars in Thousands) 10. Related-Party Transactions Included in administrative and loan servicing fees are administrative fees paid to BHESC and servicing fees, which comprise servicing fees paid to BHESC and servicing fees paid to thirdparty subservicers. During the years ended June 30, 2013 and 2012, the Authority recorded $9,469 and $10,766, respectively, in administrative fees paid to BHESC for providing administrative support, such as accounting and information technology infrastructure. During the years ended June 30, 2013 and 2012, the Authority purchased $47 and $13, respectively, in principal amounts of student loans from affiliated entities at market prices. The premiums paid on the purchase of student loans are capitalized and included in student loan notes receivable in the accompanying financial statements. During the years ended June 30, 2013 and 2012, affiliated entities purchased $36 and $1, respectively, in principal amounts of student loans from the Authority at market prices. 11. Subsequent Events Subsequent events have been evaluated through October 28, 2013, which is the date the financial statements were available to be issued. 1307-1107914 26 Ernst & Young LLP Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This Report has been prepared by Ernst & Young LLP, a client serving member firm located in the United States.
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