Higher Education Sector
Successful Fundraising in a Challenging Environment
There is plenty of evidence indicating significant demand for debt from British universities to fund capital investment plans. £2.2bn of net additional borrowing is projected to 2018-19 in England alone but this is a modest element of the proposed capital investment plans totalling £17.8bn during this period. This investment profile is not surprising given that institutions are striving to attract students, deliver an excellent experience, and develop a high-quality estate infrastructure.
So, what are the challenges for universities, and what might a lender or investor be considering beyond the hard financial analysis of the credit quality of a university borrower?
The recent Financial Health publication from HEFCE highlighted the increasing divergence in performance between English universities whilst reiterating that overall the health of the sector in England looks robust.
Understanding that any lender or investor will be focused on the headwinds that are prevalent in the market is a good discipline for any institution. For borrowers, being armed with a rationale to mitigate areas of concern should naturally form part of the planning process.
• Student number projections – 12.1% growth predicted across the sector in England, in full time undergraduate Home/EU students to 2018-19 and £1.2bn of additional funding from International students against the backdrop of uncertain Brexit implications and challenging immigration policy and general declining demographic profiles. How robust are those projections and what sensitivities have been performed? Some would question where these students are coming from as overall demand may not look that evident. So, have some institutions got it wrong?
• The forecasts submitted in July were prepared prior to the outcome of the referendum on the EU. Does the forecast growth predicted by many institutions in EU students still hold? Unlikely, but depending on the outcome of the Brexit negotiations a smaller number of EU students may be paying higher International level fees.
• Irrespective of the EU referendum result, the UK government has adopted a strong policy on immigration. International students are finding it harder to work in the UK, coupled with the increasing competition from overseas universities. In the light of this, is it realistic to expect International student numbers to continue to rise in the medium term?
• Liquidity levels – a significant percentage of the proposed capital investment plans will be funded from internal resources, reducing liquidity while debt levels are rising. The English sector is forecast to move from a position of substantial net credit to a net borrowing position of £3.9bn by July 2019. This is a significant shift – leading we suspect to sustainability being challenged more vigorously.
• Pension Liabilities – this is an area receiving greater focus as pension liabilities and deficits continue to rise. The implications of higher employer contributions and deficit recovery plans are key. This is especially relevant if the USS deficit of £5.3bn is, as forecast, predicted to rise to £12.5bn.
• Inflationary pressures – control of pay costs (whilst maintaining the right calibre of staff) during a period when income streams (and growth of them) maybe less certain.
On top of this we have the introduction of FRS102 – whilst we know underlying performance hasn’t changed, the presentation of the financial statements brings into sharp focus aspects that previously may not have been as transparent, or in some cases introduces new concepts:
• Recognition of Capital Grants (depending on the accounting policy options adopted) and the impact of depreciation in future years if the grant is taken to the Statement of Comprehensive Income and Expenditure in the financial year.
• Revaluation of Fixed Assets (depending on the accounting policy options adopted)
• Pension Deficits, and the deficit reduction arrangements.
• Off balance sheet financing that may now have come on balance sheet.
• Financial Instrument liabilities, and the volatility that changes, year on year, may bring
Then there is the proposed Higher Education and Research Bill 2016-17 currently in the legislative process:
• The focus on teaching quality permeates throughout, and that must be a good thing for students and for maintaining the worldwide reputation for the UK’s HE provision. The TEF does though introduce another measure / differentiator. Students and their parents are certainly likely to pay attention to this and lenders and investors may consider this aspect in a similar way to which they currently consider league table positioning.
• Another theme of the Bill is the continued aim of creating more choice for students, making it easier for institutions to gain degree awarding powers, and obtain University status, albeit with robust checks and balances to ensure the reputation, and financial sustainability of HE in the UK is maintained.
• The regulatory restructure and the creation of the Office for Students and the UK Research and Innovation organisation is a major legislative reform. Lenders and investors derive confidence from a strong regulatory environment within which the institutions they are lending to, often long term, are operating in. The Bill creates considerable change, but equally brings together several stakeholders currently contributing to the regulation of HE and a few disparate pieces of legislation, potentially creating a clearer landscape.
The above is not exhaustive but a high-level view of some of the sector wide issues that any lender or investor will be looking to get comfortable with.
Most institutions will have clear strategies that address these areas, and it is the clarity with which the institution presents its credit story that will drive the confidence of lenders.
In summary, an institution will need to:
• Tell the story – The history of the institution, the journey of how it has developed into the institution it is today.
• Articulate its strategy, clearly defining its differentiating factors, and linking the current opportunity and funding request to the strategy.
• Address areas of concern specific to the institution (for example, weak or deteriorating NSS outcomes) and explain the reasons and the actions being taken to improve.
• Address the common sector wide challenges (some of which are described above) and describe how the institution is dealing with them.
• Provide a clear organisational and governance overview, supported by biographies of key Governors / senior management.
• Financials – Apart from the obvious Audits and Forecasts, share the monthly / quarterly management information to demonstrate the depth and quality of how the institution tracks performance. Include commentary, assumptions, and sensitivities where appropriate.
• Explain the current debt profile / commitments if any, and the repayment profiles, any security given etc.
• Above all an explanation of what the organisation is looking to achieve from the fundraising, what its priorities are and what level of risk the Board is willing to accept. These areas will start to define the best structure for the borrowing being contemplated.
Here at Centrus Advisors we would be delighted to help you with this process. We pride ourselves on being one of the UK and Ireland’s leading debt and derivatives advisory businesses. We believe passionately in the value of strong client relationships.
Whether you are contemplating raising debt, considering financing options for new developments or considering the efficiency of your existing funding arrangements, we would be delighted to meet with you to offer our perspective.