Loans plan could be a learner earner

The notion of selling $26 billion in tertiary student HECS/HELP loans might be politically controversial, but it's an asset with a lot of appeal and a ready market.
By · 17 Oct 2013
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17 Oct 2013
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The notion of selling $26 billion in tertiary student HECS/HELP loans might be politically controversial, but it's an asset with a lot of appeal and a ready market.

The scheme developed to fund students through university was not set up as a money-making venture, it was more of a public service.

But with a bit of engineering and structure this giant loan book could be packaged into a commercially saleable asset that would hold plenty of appeal for professional investors.

Several weeks into its first term the Abbott government is beginning to hunt for one-off items to improve the budget bottom line. The low-hanging fruit was plucked by previous governments so some old chestnuts are being revived, among them Medibank and Australia Post.

The government's so-called Commission of Audit has been on the case and will turn over plenty of rocks along the way.

While the Greens didn't take a liking to the prospect of selling student loans, financial experts thought securitised student loans would hold plenty of appeal for investors, particularly super funds.

It would be a new line of business in Australia, although various forms of student loan securities are marketed in other international jurisdictions. The particular twist in the Australian case is that the loans do not attract interest, although their value is adjusted for inflation so they don't depreciate over time.

But selling via securitisation would require them to be significantly discounted to ensure a return for investors - potentially by up to 50 per cent depending on the time frame of the investment.

This could cover any further adjustment to factor in the default rate on these loans. There are plenty of borrowers who never repay student loans, particularly those who move overseas.

According to some reports the HECS/HELP loans grew by $3.2 billion last year to more than $26 billion, of which more than $6 billion will not be repaid.

Borrowers are only required to repay loans after they are employed and their income hits more than $47,000 annually. The percentage paid increases incrementally depending on the salary.

A portion of borrowers won't hit the earnings threshold, a number will drop out of the job market and some won't finish their degrees.

The rate of default has also been rising over the past couple of years because a larger number of students are undertaking tertiary studies as the bar to entrance has generally been lowered.

There is plenty of historical data in government hands about the student repayment experience.

If attractively priced, financial experts say securitised student loans would be sought after. By its nature it would be a diversified portfolio of loans, some of which were recent and others maturing from a cross-section of borrowers employed in different sectors at varying pay levels.

It would be virtually impossible to sell the loans in one bundle, so the likelihood is for them to be offloaded in tranches. For the government it represents the opportunity to turn a long-term asset into short-term cash. The loan book would perpetually replenish itself as new HECS/HELP loans were taken out.

The securitisation process would probably be easier to navigate than privatising health insurer Medibank and much simpler than an IPO of Australia Post.

In recent weeks Malcolm Turnbull has ruled out altering the ownership of Australia Post, a business containing a strong growth division in express parcels next to a legacy postal division that has universal service obligations and regulated pricing. It is expected to deliver its annual report, and earnings result, to the government on Friday, providing a point for fresh debate.

Focus on Ten

Ten Network gets its moment in the spotlight (or shade as the case may be) on Thursday with the release of its full-year result, which should be a small underlying operating loss, a reported loss of more than $250 million, and revenue that has declined by about 15 per cent.

It's the first full-year earnings report being fronted by the newish chief executive, Hamish McLennan, who joined the network six months ago. There is no expectation that investors will see too much evidence of a turnaround but McLennan will get a report card from analysts in relation to his cost-cutting results.

Thanks to some judicious programming spends there is a glimmer of hope that ratings and advertising share might start to pick up down the track, but no sign yet for Ten investors who are no strangers to false dawns in this regard.

(Indeed one of Ten's biggest problems is getting caught in the crossfire between Seven and Nine, as the latter hoards its programming arsenal preparatory to a public listing later this year.)

Citi analyst Justin Diddams said he expected the advertising market backdrop to improve in the 2014 financial year. If this proves correct, Ten will be assisted by a tailwind.

The key to the result will be any hints on outlook and market share. There are plenty of less risky cyclical stocks out there, so Ten will need to provide investors with confidence that it's a worthy punt.
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