The U.S. is a pioneer in an array of assets, but if you want to bone up on tuition-backed deals, you've got to study abroad. Until recently, the only market worth the trip was Chile, which hosted the first two tuition bonds in the region during the first half of the year. Now Brazil has something to offer. Latching onto a fund structure that has made inroads over the last several months, finance firm Ideal Invest has set up a revolving deal backed by tuition receivables. "It already has R$20 million (US$6.9 million) in receivables and should grow sharply in coming months," said a source familiar with the deal, which is rated brBBB+' by Standard & Poor's.

So far, six institutions in the vicinity of Sao Paulo that are either technical or secondary schools have borrowed from the structure for a total R$6 million (US$2.1 million) and in turn have sold rights to their receivables. In order to receive funds, a beneficiary sells receivables with a coverage ratio of 3X. The average life of receivables is roughly one month. For now, Ideal is marketing the paper to private investors. "They want to test the structure to see if they want to go public," the source said. Known as FIDCs, receivables funds got started this year in a belated response to a regulatory framework set up in December 2001. Their success has been mixed. While they offer alluring tax incentives for investors, they must contend with yieldy treasuries. As growing confidence brings treasuries to heel, observers expect FIDCs and other structured paper to have more a fighting chance.

Chile government hopes market graduates to loans

Meanwhile in Chile, where the tuition asset class first took root, the sector has quieted down. Even though Universidad Diego Portales and Universidad de Concepcion now enjoy debt-servicing costs well below the industry par thanks to deals they completed this year, their peers have yet to follow suit. One theory is that the potential for student unrest, however remote, has kept a number of structurers away.

At the same time, student loans - a flourishing asset class elsewhere - have not been tapped in the Chilean domestic market. An initiative pushed by the Ministry of Education hopes to change that. In a bill presented to congress, the ministry spells out a new regime, whereby the government would purchase student loans and then sell them to a trust established by any one of the country's securitizing agencies. Currently, the government provides the loans, albeit in a roundabout way, and the sector is wracked with defaults. In a speech delivered at a FitchRatings conference, ministry official Alicia Leiva said the new system would professionalize debt collection, while the role of the government would be limited to one of guarantor, essentially purchasing loans from the trust if the indebted student drops out. The government has launched this effort in part because of the federal subsidies disguised by the current arrangement. Due to pervasive defaults and the below average interest rates charged students, the state ends up footing the bill.

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