Subprime-lending woes that have pained mortgage lenders and Wall Street banks are taking a toll in another arena -- academic institutions such as Corinthian Colleges.Private student loans are being lended to students more hesitantly, but obtaining a private student loan in addition to federal funding is not impossible. As Corinthian reports fiscal fourth-quarter results Tuesday, Wall Street wants to hear how well the company is handling borrowing stresses among its students.
The company, which offers short-term diploma and degree programs at more than 100 post-secondary schools across the U.S. and Canada, says about 10% of its fiscal 2008 revenue came from private loans to subprime student borrowers. However, "the bigger picture," says Kevin Doherty, at Banc of America Securities, "is that about 75% of it students are subprime."
Corinthian is ramping up a program to lend internally to those students, and has said that between 2% and 3% of would-be borrowers likely won't be eligible for loans. But that means a large number will. So the company faces the prospect that the bad debt that student-loan lenders are trying to avoid "grows on Corinthian's balance sheet," says Mr. Doherty.
That, says Amy Junker, a Robert W. Baird analyst, would likely mean compressed profit margins at some point.
She notes that the stock is near a 52-week high, and sports a lofty P/E exceeding 50, on company statements earlier this year that margins will expand in 2009 and beyond. But if subprime problems persist, Corinthian could fail at achieving those projections, undermining its richly priced shares.
By: Jeff D. Opdyke
Wall Street Journal; August 26, 2008
