Standard & Poor's highlighted the potential for Mexican universities to enter the capital markets in a report last week. "Once they're rated, the most probable route to the market will be securitization, either of tuition or student loans," said Juan de Mollein, a director on the agency's Latin America structured finance team.

So far, S&P has only assigned a single public rating on a university -mxBBB' to Universidad de las Americas - but expects more up ahead. Intensifying global competition, a relatively young population and infrastructure demand are expected to turn up financial pressure on universities and swivel their attention to the deepening ABS market.

Which asset will emerge as the collateral of choice is an open question, but dealmakers appear to be leaning toward tuition. "Loans aren't much of a standard product yet in the Mexican market," said a banker active as a domestic arranger of ABS. "And the volume is very small compared with tuition."

Another banker working on the trustee side agreed. "I'd be surprised to see student loans," the banker said, adding that tuition is already being bandied about the sector as an eligible asset.

Up north, student loans have matured into a solid sector, making up nearly 10% of new supply in the U.S. ABS market during the first half of 2004. But in peer countries such as Chile and Brazil, universities have stuck to tuition, putting out deals that are essentially future-flow transactions.

A Chilean affiliate of American International Group (AIG) and ABN AMRO each arranged one tuition-backed deal in Chile last year for a total of 3 million inflation- indexed units (US$80 million). Brazilian shop Unitas has led a tuition-backed debenture for R$205 million (US$67 million), while a multi-originator tuition receivables fund in Brazil started issuing shares last year.

In assessing higher education in Mexico, S&P points out some particularities of the system. Unlike in the U.S., universities do not maintain tenured faculty, which helps keep down fixed costs. On the other hand, foreign students make up a meager percentage of the student body as compared to the U.S. and the U.K. and, as such, demand in Mexico turns more on domestic economic conditions.

Another feature of the Mexican system is the lack of a philanthropic tradition, which typically provides a fat cushion for many private U.S. universities. With scant or no endowments, universities in Mexico are more vulnerable to oscillating cash flows, S&P said.

But, according to one banker, funding from a sponsoring institution at some private universities can more than offset a lack of endowment. "Some of them have companies backing them up and the loans to these institutions can be tax-deductible," he said.

During a deal pitch, for example, one university official asked how long a securitization would take. When the answer was "months", he picked up a phone and said that was how long it took him to secure funds from a sponsoring company.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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