Consider the 6 month performance of the education services industry relative to the S&P courtesy of Google Finance:
- Schools -24.07%
- S&P -11.66%
The industry slump comes from concern over private student lenders, who securitize the student loans and sell them to investors. This is the very same process as with the MBS that have wreaked havoc on the market since the latter half of 2007 when the large write downs began. This creates a contagion effect and there has been a huge slowdown in the student loan ABS market; according to Securitization.net,
"Overall, issuers completed $58.8 billion of student-loan securitizations last year, according to Asset-Backed Alert's ABS Database. Some $18.4 billion of those deals priced by the first week of March, placing the year-to-date slowdown at 67%."
With such a large slowdown in student lending the concern then switches over to the education institutions themselves with worries over enrollments and the industry is down approximately twice as much as the S&P to reflect that. However, Uncharted Waters writers and readers know better and can smell a possible bargain like poo on a baby! The cards don't lie child (lord o mercy!):
- Apollo Group, Inc. (APOL) -39.21%
- DeVry, Inc. (DV) -21.01%
- Strayer Education, Inc. (STRA) -11.31%
All three of these stocks are down big YTD as you can see. However, the contagion effect from the ABS worries is unjustified. Each of these three institutions have 5% or less exposure to private loan revenues. Why is this significant? Well because government issued student loans are federally guaranteed up to 97% in the case of default. This is even true for securitizations where government issued student loans are included.
"For the issuers' part, many industry players describe the crisis as a question of liquidity, rather than credit quality. Since most of the loans backing auction-rate student-loan paper carry 97% guarantees from the federal government, investors would likely be made whole even in the event of widespread collateral defaults. That has some calling the exodus from auction-rate notes the result of panic."
Because of the lack of exposure to student private loans though, these three institutions haven't been affected in finding sources of capital for their enrollments:
- DeVry, Inc. saw total undergraduate enrollment increase by 10.3% from fall 2006 to fall 2007.
- Apollo Group, Inc. saw an 11% increase in average degreed enrollment for the 6 months ended February 2008 relative to February 2007.
- STRA had a 16% increase from the previous year in average enrollment
A Second Look at Educational Services and Student Lending Problems
Key Education - Lending Source Obliterated
Education Lenders Transferring to Floaters
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