The higher education (HE) sector has become increasingly competitive. Universities are vying for position on a global scale – competing to attract prospective students, as well as secure and retain the best academic talent.
This fierce competition – combined with a move towards commercialising academic research, embracing new ways of teaching, and ever-higher student demands (especially since the rise in tuition fees) – has been driving capital expenditure.
Last year (2015/6) universities invested heavily in estates and facilities, funded by large-scale borrowing, and according to the Higher Education Funding Council for England, this was just the start. Universities were planning £4.2 billion in CapEx up to 2020 – a 60% increase from the previous four-year period.
Then came Brexit.
The vote has created a wave of uncertainty and triggered the pressing of the pause button for many institutions, which are now questioning what the impact will be on investor sentiment, funding availability and cost, as well as long-term financial stability.
At this stage a lot is unknown, but what is certain is that for universities that have already borrowed money at a fixed rate, the impact of Brexit will be limited. Irrespective of what happens to underlying interest rates, gilts, or even the credit rating of the university itself, interest payments will remain the same.
Similarly, to our knowledge, there are no examples of specific Brexit defaults being included in loans or bonds. Unless it can be demonstrated that the vote has materially and adversely impacted a university’s business – which is highly unlikely – the vote will not entitle any investor, including the European Investment Bank (EIB), to early repayment.
For those universities who are looking to borrow in the coming months, the opportunity to lock in long-term debt at historically low prices is out there.
In theory, the post-referendum downgrade of the UK government and that of the university sector should have resulted in more expensive bonds, but that is not what is happening. Gilt rates are at historic lows, and the spreads for not-for-profit issuers are holding at pre-referendum levels.
Those institutions that have issued bonds since the referendum have achieved eye-wateringly low pricing, perhaps 1% cheaper than institutions who issued before 23 June. For now at least, investors still see the university sector as a safe haven and remain keen to invest.
However, uncertainty may start to dent investor confidence – the fall in world rankings for many universities in the recently published QS World Rankings should perhaps sound a warning, especially for those universities without a well-established, world-class brand.
While universities need to exercise caution when taking on increased levels of debt, competition for students, both domestic and overseas, means that continued investment is more necessary than ever
While the Brexit timetable is still largely unknown, staying alert to key dates on the HE calendar will be critical in order to find clarity. The Higher Education Bill, although not specifically related to Brexit, will be crucial to understanding the nature of regulation moving forward, and we can expect an update on this from the Public Bill Committee by the 13 October this year.
Keeping a close eye on immigration policy changes, in order to understand how overseas students might be impacted by the Brexit vote, as well as staying abreast of how the Government plans to replace any EU research funding, will also be vitally important in building a clearer post-Brexit picture – updates that may come as part of the Autumn Statement.
While universities need to exercise caution when taking on increased levels of debt, competition for students, both domestic and overseas, means that continued investment is more necessary than ever in order to compete on a world stage.
Sarah Seed, partner in the banking and finance team at national law firm Mills & Reeve, specialises in advising banks and borrowers within the not-for-profit sector.