Post-pandemic finances: universities and their lender covenants

David Emanuel says it is imperative universities examine their existing financial operations in the coming months

The Covid-19 crisis has challenged UK universities to respond at great speed to both the effects of Summer term closure, and the possible longer term consequences of travel restrictions on overseas student numbers in planning for at least the next academic year. These new challenges have arrived from leftfield to sit alongside existing issues of adapting to new regulatory and funding regimes, not to mention Brexit .

University finance directors may be feeling in all this a little like Henry Bolingbroke in Shakespeare’s Henry IV Part I who complains to the Earl of Westmoreland: “So shaken as we are, so wan with care, Find we a time for frighted peace to pant..”.

In a very fast moving situation, the landscape is likely to change quickly. However, it is clear that university responses to the coronavirus crisis will probably involve change to existing operations and business models. 

In this context, this article is intended to remind finance directors of restrictions and obligations in their borrowing facilities which will need to be factored into their planning.

Government Support Package

The government’s support package for higher education providers and students confirms that higher education providers are eligible for already announced government support schemes – the Coronavirus Business Interruption Loan Scheme (CBILS), and the Coronavirus Large Business Interruption Loan Scheme for institutions with revenue above £45m (CLBILS). Also available to a small number of universities – nine in total – who have previously issued commercial paper and have an investment grade rating, is the Covid Corporate Finance Facility (CCFF).

The government estimates that this supported funding could create additional borrowing capacity of £700 million to the sector.

Any additional borrowing universities undertake under CBILS or CLBILS would, it is assumed, be on terms to which the issues raised in this article would apply in any event.

Borrowing Covenants and Undertakings

Many universities will have bank facilities in place to fund specific projects as well as working capital. This article considers some common Loan Market Association (LMA) loan terms, on which many such facilities will be based.

 At least 50 UK universities have also raised funds in recent years through Private Placements. It is very likely that the terms of privately placed bonds will contain similar provisions to LMA terms which finance directors will need to take into  account.

Post-pandemic finances: universities and their lender covenants David Emanuel
David Emanuel, partner at education law firm VWV, reminds universities of the importance of consulting lenders before changing their business plan.

Some Key LMA Terms for Covid-19 Planning

There are two obvious areas that will now become relevant for discussion with lenders in any event. These are:

“Material Adverse Effect” clauses – which are typically defined to be a material adverse effect (materiality is not usually defined save that the lender must generally be reasonable in its opinion that there is a material adverse effect) on: the assets, financial condition or business of the borrower; or the borrower’s  ability to meet its payment obligations or its financial covenants.

It can be seen that this is widely drawn, and also gives the borrower the option to consider its opinion now on the potential future breach of financial covenants, which will not otherwise be tested until after financial statements for the year have been approved and circulated to the lender.

In addition, many facilities will include obligations to report material adverse changes as they occur, as well as copying updated information and forecasts as they are provided to the Office for Students. Accordingly, in most cases finance directors will need to be discussing their planning and forecasting with the bank from the outset;

Financial covenants – depending on the type and term of facility these will generally include some of the following:

  • A Reserves Covenant (usually either a specified amount or a percentage of consolidated income)
  • Gearing (a ratio of Total Debt to Net Assets
  • Cashflow cover (a ratio of adjusted income to debt service costs)
  • Loan to Value (a percentage of the value of specified property which the outstanding loan must not exceed) 
    Asset cover (as for LTV but with reference to Net Assets generally).

Financial covenants are generally tested annually with reference to audited Annual Financial Statements on a look back basis. There is therefore a time lag before breaches would become apparent  under the normal operation of covenant testing. However, reporting requirements and Material Adverse Effect provisions generally serve to bring these issues forward.

Lender Responses

The recently announced government support package reminds lenders and borrowers that they are expected to act responsibly, and certainly we would anticipate that the UK regulated banks that lend into the sector will continue to act in the responsible way that they have historically done in relation to HE customers. It is hoped that holders of bonds issued in private placements will mirror the measured response of bank lenders.

The government support package announcement does however expressly stop short of guaranteeing support in all circumstances, and states that where “..a higher education provider finds themselves at risk of closure, we will only intervene further if there is a case to do so, and only where we believe intervention is possible and appropriate, and as a last resort”. 

That removal of an implicit government guarantee of HE institutions may become significant for the future availability of bank and other debt, and the terms on which it is offered.

LMA Restrictions on Future Activity Relevant to Business Planning

LMA terms will generally require the bank’s consent to:

  • Any change of constitution or change of control 
  • Any merger, consolidation or restructure
  • Asset disposals (usually above a threshold)
  • Establishing new subsidiaries or entering into joint ventures
  • Acquisitions of shares or assets
  • Any change of regulated status.

Accordingly, in shaping any changes to business models in response to the Covid-19 crisis HEIs will need to involve their lenders early in the process to obtain the necessary consents. This is likely to be a practical challenge if swift change is required and while bank underwriting resources remain stretched. However an open and regular dialogue will help both parties as the sector finds the way through its current difficulties.

Next Steps

Finance directors will find value in reminding themselves  of the terms of their existing facilities in the context of reviews of rolling business plans that will be currently underway, to help gauge the extent to which they will need to involve their banks in those evolving plans. For universities with facilities with more than one lender, you should also check Cross Default provisions.

It is a period of perhaps unprecedented pressure on the sector. Returning to Shakespeare, Henry IV Part I ends with triumph against Hotspur and reconciliation between father and previously wayward son. A similarly satisfactory ending is to be hoped for as universities rise to the challenges they face.

David Emanuel is a partner at leading education law firm VWV. 

David can be contacted on 07876 210 497 or at

To be kept up to date on legal, regulatory and governance issues, please register for VWV’s dedicated HE portal OnStream

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