For-Profit Colleges Beat Peers on Loan Breaks: Corporate Brazil

Anhanguera Educacional Participacoes SA (AEDU3), Brazil’s largest for-profit university, and its two biggest Brazilian competitors are beating global peers after student loans tripled when the government reduced interest rates and made repayment easier.

Estacio Participacoes SA (ESTC3), the third-biggest provider by market value, posted a total return of 91 percent this year, the most of 32 global for-profit colleges, data compiled by Bloomberg show. Belo Horizonte, Brazil-based Kroton Educacional SA (KROT3) boasts a total return of 84 percent, and Anhanguera has returned 64 percent. That compares with an average negative return of 30 percent for 15 U.S. college stocks.

For-profit universities in Brazil are benefiting as rising incomes and greater access to credit boost demand for higher education in Latin America’s largest economy, where fewer than 1 in every 10 Brazilians has a college degree. More students are turning to online courses and night classes at private institutions as some state-run universities accept fewer students than Ivy-League schools including Princeton University in New Jersey.

The government’s improved student-loan program “was a big game changer for these companies,” Luiz Fernando Azevedo, an analyst at brokerage Bradesco Corretora, said by telephone from Sao Paulo. “It not only helps in attracting middle-class students who know a college education is key to a better future, but it also helps to keep them inside the classrooms.”

$3.45 Billion Loans

The number of student loans granted this year under the Education Ministry’s Fies program has tripled to 305,800 since 2010, when the government released rules cutting interest rates and extending the time to start repaying debt to 18 months after graduation from six months. Rates charged on government student loans fell to 3.4 percent a year from as much as 9 percent. About 33 percent of Kroton’s students have Fies loans, compared with as much as 12 percent at Estacio and 12 percent at Anhanguera, according to interviews with the companies’ executives.

Estacio fell 0.7 percent to 33.77 reais at 3:43 p.m. in Sao Paulo trading, while Anhanguera climbed 2.8 percent to 33.94 reais and Kroton gained 2.9 percent to 34.88 reais.

Banco do Brasil SA (BBAS3), which handles the loans along with fellow state-run bank Caixa Economica Federal, said its Fies portfolio more than doubled to 7 billion reais ($3.45 billion) this year from 3.1 billion reais in 2011, according to the bank’s press office. The National Fund for Education Development, which operates the Fies program, distributed 2.28 billion reais in loans in 2012, according to the agency’s press office.

Swelling Debt

Student loans are rising along with consumer borrowing. Consumer loans, carrying an average 30.1 percent annual interest rate, rose 15 percent to 560 billion reais in the 12 months through August, central bank data show. Delinquency rates have also climbed, reaching 7.9 percent in August.

Higher delinquency rates are the main risk for private educational institutions, according to analysts.

“Economists expect Brazil to accelerate again next year, which should help to sustain income levels and push unemployment down, but when analyzing education spending it’s necessary to consider a broader period of time, because we don’t know what’s going to happen in three or four years,” said Miguel Ribeiro de Oliveira, president of Anefac, a financial sector association.

‘Heated Growth’

For-profit universities in the U.S. are facing increased scrutiny from lawmakers, the Justice Department and state attorneys general amid complaints recruiters pressure students to enroll and dodge questions about the full cost of the programs. A Senate report released July 29 found that the schools spend more on marketing than instruction and devote more staff to recruiting students than ensuring the success of their existing ones.

Apollo Group Inc. (APOL), the biggest U.S. for-profit university, has plunged 46 percent this year, while second-biggest DeVry Inc. (DV) lost 41 percent and Grand Canyon Education Inc. (LOPE) rose 46 percent. The companies didn’t immediately return Bloomberg’s e- mails requesting comment.

“We’re in a phase of heated growth, while the U.S. is going through regulatory difficulties,” Kroton Chief Financial Officer Frederico Brito e Abreu said in an interview yesterday at the Latin Finance Forum in Sao Paulo. “Brazil had a complete mismatch between supply and demand. There was a huge part of the public that couldn’t gain access” to higher education.

The expansion of loans in Brazil coincides with a surging middle class. Brazilians earning at least 1,064 reais a month accounted for 56 percent of the population in 2011, up from 50 percent in 2009, according to the center of social policies of the Getulio Vargas Foundation.

Acceptance Rates

Meanwhile, the nation’s free public universities are struggling to expand fast enough to meet demand. Government schools offered spots to only 27 percent of the 53.8 million people who attended college in 2011, data from the Brazilian Institute of Geography and Statistics show.

USP, the state university in Sao Paulo that ranks 169th in U.S. News and World Report’s list of the 400 Best Universities, accepted only 7.4 percent of the 146,892 students who applied last year. Princeton accepted 7.9 percent of its applicants for its 2012 freshman class, and Columbia University offered spots to 7.4 percent of its applicants.

Under-Investment

“Under-investment and a lack of planning in education by the Brazilian government is positive for private universities -- it means more room to grow,” Sandra Peres, an analyst at brokerage Coinvalores, said by phone from Sao Paulo. “Social mobility is a direct result of the country’s growth, with higher average incomes and lower unemployment. The kids of people who didn’t have many opportunities before now understand that education is the way to build a successful career.”

Kroton, backed by private-equity firm Advent International Corp., is counting on its 1.3 billion-real acquisition of Unopar, Brazil’s largest distance-learning institution, to fuel growth. The company may make more acquisitions next year, Carlos Lazar, Kroton’s investor relations director, said in a telephone interview from Sao Paulo.

Estacio plans to to expand through acquisitions of institutions with less than 10,000 students and at schools it already operates, Chief Executive Officer Rogerio Melzi said in an interview. The company sees an opportunity to pair with companies to offer education to mid-career managers, Melzi said.

‘Small Fraction’

Kroton, Estacio and Anhanguera’s schools are concentrated in the South and Southeast, which have higher per-capita incomes and are more populated. As the middle class expands in other regions of Brazil, demand for classes will climb, Jose Augusto Teixeira, chief financial officer of Anhanguera, said in a telephone interview from Valinhos, Brazil, where the company is based.

“We’re certainly present in only a small fraction of the potential market,” he said. “We are concentrated in Sao Paulo, the South and Midwest, but to reach our goal of serving 1 million students, up from the 432,000 we already have, other capitals and bigger cities in the countryside, like Rio de Janeiro, Curitiba and -- in the Northeast -- Salvador and Fortaleza present many interesting opportunities.”

To contact the reporters on this story: Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net; Fabiola Moura in Sao Paulo at fdemoura@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net

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