The recent announcement by the University of Oxford of its intention to sell £250 million of 100-year bonds to the capital markets has reopened the debate on the financing structure of universities. The level of university external borrowings as a percentage of total income is on the increase and is forecast to continue rising, but is this a bad thing?
When I attended Durham University more than 20 years ago, it was not unusual for students to share rooms. En-suite facilities were for the lucky few; most had only a sink in the room. Roll forward to today and many students expect a minimum of a single room with en-suite facilities and require wi-fi, a coffee shop and a gym built into their accommodation complex. Indeed, many new student accommodation developments are built to such a high standard that the flats can be sold or let to the young professional market.
So what has changed?
Technology has obviously advanced, as has the decision process for choosing which university or course to attend. University tuition fees also used to be paid by the government, and some students received additional government grants to help cover the cost. Today, a student pays to study (albeit this may be through a loan that often will never be repaid in full), and so there is a much greater “cost versus reward” consideration. The number of foreign students has also increased, and it is these higher-paying students who are being courted not just by universities in the UK but also by a worldwide market.
It has, therefore, become necessary for universities to invest heavily in their estates to remain competitive in what is becoming an increasingly global market and one that is bearing more resemblance to the corporate world.
As the level of government funding fell, universities first utilised their cash surpluses to fund such investment, but external debt has also been required where cash reserves are insufficient or a programme is extensive. This has also coincided with a period in time when institutions, such as pension funds and life companies, that have historically relied on the corporate bond market for yield are looking for new opportunities to generate income to service their liabilities.
University bonds and private placements are seen as attractive investments that, at the same time, provide universities with long-term debt at a fixed, and often low, cost of capital.
Between 2008 and 2011, no bonds were issued. Fast-forward five years to 2016, however, and $1.8 billion (£1.3 billion) of bonds were issued by UK universities and schools, up from $1.4 billion in 2015. In addition to bond finance, the university sector remains attractive to banks, which might not be able to provide the long-term funding previously seen but can provide competitive short- to medium-term finance.
Many UK universities are among the best in the world, employing more than 300,000 people and attracting more than 400,000 overseas students to the UK each year. This has huge economic benefit and has been possible only through continuous investment in areas such as state-of-the-art educational facilities, which have been funded in part by debt.
While the term “debt” carries with it many negative connotations, when it is managed correctly and obtained at a sustainable rate, it can be an effective way of providing opportunity, ensuring growth and helping to maintain a position in an increasingly competitive market.
But debt can be a double-edged sword; it needs to be serviced and, at some point, repaid. The recent downgrade of seven UK universities’ credit ratings by Moody’s reflected not just a general reaction to the UK sovereign downgrade but also Brexit concerns, increased competition and a general weakening of student demand.
The Higher Education Funding Council for England has warned that the current economic climate will “present challenges to some higher education institutions in achieving their financial projections”. The key, therefore, will be in securing sustainable investment that balances the requirement for capital expenditure to remain competitive but at a pace that is affordable for the institution. Standing still, however, is not an option.
Philip Stephenson is director, recovery and reorganisation at Grant Thornton UK LLP.