A recent bond deal by Peru's Universidad de San Martin de Porres proved to be an education for the academic issuer. At first, the college was keen to float a tuition-backed deal, more or less along the lines of the Chilean universities that had done so in 2003. But arranger BBVA Banco Continental concluded that a straight securitization was not a good idea.
"The only future flow deals in Peru have been done by companies that were financially weak," said Julio Montoya, head of capital markets at BBVA Banco Continental, citing one disincentive. But more importantly for the health of the transaction was that, in Peru, regulators overseeing a securitization don't interact with the originator. "In a securitization, Conasev [National Supervisory Commission on Companies and Securities] only deals with" the trustee, Montoya said. That approach, he added, could jeopardize the risk of a future flow deal, where the ongoing performance of the originator plays a critical role. "From our point of view, this would not be giving the complete information to investors," Montoya said.
In the end, San Martin issued a $15 million, seven-year bond secured by future tuition receipts from select schools in the university and enhanced by a 30% guaranty from the International Finance Corp. The paper priced at 300 basis points over three-month Libor on July 25. Fitch Ratings affiliate Apoyo y Asociados and local agency Pacific Credit Rating rated the deal AA+' on the national scale, exceeding San Martin's credit strength, according to Montoya.
The university had previously relied on bank financing that cost 550 basis points over three-month Libor for a five-year term. The $15 million deal kicks off a $30 million program.
The IFC is not new to enhancing bonds in Latin America's education sector; it provided a roughly 30% surety for the first of two tuition-backed bonds issued in Chile two years ago. The originator, the Universidad Diego Portales, raised one million UF inflation units ($31 million) in an eight-year issue, which closed May 2003. The University of Concepcion swiftly followed suit, with a 10-year two million UF deal that priced in June 2003.
Unfortunately, no other institution of higher learning has stepped up the plate in Chile since then. The prospects in Peru for a robust business in tuition deals don't appear to be better. Montoya said his outfit was talking to a couple of other issuers, but that the requisite mix of steady predictable flows and financing need was hard to find. Additional, smaller transactions are not out of the question however, he added.
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