Which university bonds will the Bank of England buy?
A week or so ago, Tomas Hirst alerted me to the fact that the Bank of England extended its Corporate Bond Purchase Scheme at the beginning of November to include four university bonds as eligible for purchase. These large public issues from Cambridge, Manchester, Liverpool and Cardiff were all made in the last 5 years and illustrate my previous points about the ‘tenor’ of new university debt. These four bonds all come to maturity in the 2050s.
As Thomas’s image illustrates, this makes the university bonds long-dated even when considered alongside the housing associations and utility companies in the new tranche of bonds eligible for BoE purchase.
click to enlarge – Cardiff is under ‘C’, the other 3 are under ‘U’
The Bank buys corporate bonds off the current holders in order to reduce the yields and thereby reduce the likely cost of new issues. The plan is that this interention should lower the borrowing costs for new investment. (It also enables bondholders to switch their asset portfolio positions exchanging bonds for money now and encouraging those after higher yields to seek out riskier investments).
The Bank’s press release emphasised how pleased it was that this new development would support ‘social outcomes, including Housing Associations and universities’, indicating that they are keen for further large-scale investment from universities.
Although these four bonds are all from Russell Group universities and lie in the region of £250-350m there are significant differences in the balance sheet impact of this borrowing.
Last year, Liverpool issued £250m at 4.25% per year (£40m was private placement, £210m public). In its accounts for 2015/16, its total long-term debt (bond plus other loans) comes to £300m. This represents 61% of its total annual income of £490m.
Cardiff is similar. It issued £300m in February. The Bank of England gives its annual coupon as 4.25% but the Financial Times reported that Cardiff would only pay investors 3.1% per year. The £300m would represent 62.5% of Cardiff’s £480m turnover in 2014/15. (Cardiff had under £18m of long-term debt at the end of July 2015 when it prepared its last published accounts).
Both these universities are much smaller financially than the other two, meaning that the bonds represent a much bigger investment move. Remember that the historic debt:income norm for the sector is around 20% and the average is currently around 30%.
Manchester has a turnover of nearly £1000m. One of my favourite HE facts is that this figure exceeds the combined turnovers of Manchester City and Manchester United, which only come to around £850m.
Manchester’s £300m bond was issued in 2013 when its borrowing went over £400m. This means its current debt to income ratio is only just above 40%.
Finally, Cambridge. I wrote at more length about this bond and the projects it will fund back in 2013. At £350m, its bond is the largest out there, but Cambridge’s annual income is over £1600m. It only really has its £350 bond as long-term debt, making its debt:income ratio only about 20%. Moody’s rates Cambridge at Aaa (stable), which is better than the British State. It’s been around longer after all!
p.s. English university borrowing is expected to pass £10bn in 2019. These four bonds on their own represent 10% of that figure.