Rule 15c2-12 Filing Cover Sheet

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
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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
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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
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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
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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.
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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.
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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
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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
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