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Cardiff University issues £300m bond

February 4, 2016

Although this blog has tended in recent years to concentrate on private providers and the various issues around student loans in England, a recurring theme has been the trend for universities to turn to the public bond market. I first wrote about the likely turn to public bonds in 2011 for Research Fortnight.

Since then Cambridge, de Montfort, LSE, Manchester, Liverpool, a consortium of Cambridge colleges, and Northampton have turned to the capital markets. What’s notable about this form of unsecured borrowing is the size of the sums involved and the length of the timings (much longer than normal corporate bond issues). Cambridge borrowed £350m in 2012 – it will have to repay that ‘principal’ in  2052 and over the next forty years it will pay a twice yearly ‘coupon’ amounting to 3.75% of the principal borrowed (roughly £13m annually). Last year over £1bn of public bonds were issued by UK universities.

Cardiff University has joined in by issuing £300m. That principal is due in 2055 while the annual coupon is being advertised as the lowest ever achieved by a UK university – only 3.1% per annum. In essence, that’s the attraction of bonds to the institutions – nailing down large borrowings for fixed-cost, low annual payments. (Bonds are ‘non-amortizing’ – annual payments do not reduce the principal borrowed which must be repaid at the end). For investors, the attraction lies in having a secure, long-term return at better return than government bonds. Universities are institutions that have been around a while – Cambridge is older than the British state; Cardiff is also expected to be in existence well past 2050.

At the same time, this increased borrowing activity points to profound changes in the finances and balance sheets of UK Higher Education Institutions. Debt to annual income is a common balance sheet measure used to assess the financial health of institutions. Throughout the 2000s that ratio averaged 20% for English universities – in this current decade that sector average has climbed rapidly to break 30% on latest forecasts for 2015/16 from HEFCE. Individual institutions are now north of that mean – Cardiff itself has gone from having negligible long-term debt to around 60 per cent of annual income (£482m in 2014/15).

No one really knows what these balance sheet changes mean. Back in 2014 I pointed out to the Guardian that

“Previously, [university] governors were advised that prudence ‘beyond what would be expected in a commercial operation’ was required and that institutions should benchmark themselves against peers. In a period of competitive investment, this advice loses its pertinence: with no relevant experience to draw upon, it is difficult to assess what others are doing and whether one should follow.”

What is a sustainable level of debt for large, not-for-profit institutions like universities? What is being funded with the borrowing and does it create significant new revenue streams that can be used to service the debt? Is the assumption that large principals will have their value eroded by inflation in the intervening years? The time-scales involved in the UK mean that the rollover refinancing seen in the States is still some way off.

When I spoke to Barclays Capital in 2011, they thought that the English HE sector could increase its borrowing from its then current £5bn  by about £4-4.5bn. HEFCE estimates that the sector will hit £9.2bn in 2018 (wth sector income projected to be £30bn). Obviously the sector will have grown in that period and what borrowing it can support should be higher. But until we live through these changes it may be hard to work out where ‘prudence’ lies. As always there are potential lessons from the United States, where there was a borrowing splurge in the 2000s, but the specifics – the long ‘maturities’ of the bonds being used in the UK – of the financial instruments make a big difference.

 

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