Chile's ABN Amro Securitizadora has slated the country's first securitization in the education sector for pricing May 9. Amounting to 1.0 million inflation-indexed units (UF) (US$24.4 million), the transaction is backed by future college tuition receipts. The originator, Universidad Diego Portales, is transferring into a trust rights to collect tuition from the undergraduate schools of law, design, advertising, and journalism. To offset a drop in forecast flows or other negative events, additional academic departments can be brought into the structure. ABN Amro enlisted the three major ratings agencies to assess the deal, which achieved AA-' on the national scale across the board.
Diego Portales has an investment plan through 2010 that is heavily frontloaded. For this year and 2004, the university aims to outlay 1.29 million UF (US$31.5 million), primarily to build up departments in medicine and education. Some 462,055 UF (US$11.3 million) is earmarked for the entire timeframe of 2005-2010.
The novelty of the transaction may yield pricing that is tight for the ratings category. "Here we've got not only the first securitization in education, but it's also the first future flows deal" in Chile, said a pension fund official. While investors lack the expertise to adequately appraise such a deal, a partial guarantee provided by the International Finance Corp. provides an appreciable degree of comfort, the official added. According to sources familiar with the transaction, ABN Amro is marketing the deal to pension funds, mutual funds, and, despite the relatively short duration, a few insurance companies. The pension fund official said that the final inflation-indexed yield would likely end up in ballpark of 5.5% or roughly 250 basis points over eight-year PRC. In yield terms, that would come under double-A securitizations in UF that priced in September of last year.
The IFC covers up to US$7.2 million - roughly 30% - of the deal at issuance. The guaranty slowly diminishes through the life of the bond, to US$1.5 million or 25% of the outstanding paper at maturity.
The involvement of the IFC is another of the deal's firsts. "We've done a number of partial guarantees in various countries in the world, but this is our first one for a client in the education sector," said Lee Meddin, chief structured finance officer at the institution. The IFC plans to look for other opportunities to enhance securitizations of future tuition receipts for well-managed universities in the region. Potential host countries must combine a strong educational system, a well-functioning capital market, and developed private universities, Meddin said. The IFC does not provide financing for public education, which falls under the purview of other entities within the World Bank family.
Chile is not a typical beneficiary of the IFC since the country is more prosperous and economically sophisticated than most developing nations. But as providing sureties in education-related bonds is a pioneering field in that country, the entity is not closed off to further transactions. "We normally don't go in to do one deal," Meddin said. "We go in to create an asset class."
