Brazos Trapped by Auction-Bond Yields Above Student-Loan Rates

Brazos Group Inc., the largest municipal borrower in the $330 billion auction-rate securities market, is stuck with $7 billion of debt it can't refinance, restructure or buy back... Brazos can't generate enough cash to buy back the bonds and costs to replace them would top what it's paying, Hartung said.

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Brazos paid an average 2 percent on its auction-rate debt from 1998 until costs began rising last year, Hartung said. Yields increased amid investor concern that the creditworthiness of insurers backing the securities would weaken as losses on subprime mortgage-linked debt mounted, he said.

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Brazos officials said in 2004 they never questioned the auction process, controlled by Wall Street banks.