Lenders Risk Pain From UK Universities’ £9.5 Billion Debt Burden

(Bloomberg) — Swansea University’s Bay Campus on the outskirts of the Welsh city was expected to attract a wave of new fee-paying students to boost revenue after the government squeezed funding to the sector. These days, it’s more of a millstone after overseas enrollments failed to grow as much as expected, a symbol of the wider financial problems facing universities across the UK.

It takes 30 minutes by bus from the city center to reach the campus, which looked bleak last Friday with almost empty bike racks and fenced-off construction machinery. After increasing its borrowings to fund the construction, the institution had to renegotiate its lending terms in 2024 to avoid breaching covenants.

The difficulties at Swansea aren’t a one off. British universities have suffered a series of hits to their revenue in recent years, ranging from Covid-19 affecting food and accommodation sales to immigration rules making it harder for foreigners to study in the UK. That’s made it more difficult for the institutions to pay their debts, which swelled following building sprees on expanding facilities. The government, the sector’s regulator and restructuring experts are now in talks with troubled universities and their creditors to find workarounds that will avoid insolvencies after the strategy soured. Together, it means that lenders who bet big on the UK’s universities face a struggle to recover all of the credit provided to the industry, which according to a Bloomberg News analysis stood at at least £9.5 billion during the 2023 academic year.

“Universities have to make sure that they have their own house in order. And I think that’s what all of us are doing: we’re trying to retrench, we’re trying to reconfigure budgets, we’re trying to do things differently,” said David Bell, vice-chancellor at the University of Sunderland and a former top civil servant at the Department for Education.

About one in 10 institutions has already broken, modified or received a waiver on their covenants since the beginning of the 2022 academic year according to an analysis of the annual accounts of 150 third-level education providers by Bloomberg News, leaving creditors questioning the outlook for what was once viewed as a rock-solid lending opportunity. Some of the protections may have been eased as part of refinancings.

“Nobody wants to see a failure” among universities, said Barrie Davison, a senior director at NatWest Group Plc, which has loaned about £2 billion to the institutions. It “would ruin the reputation of the sector, not just in the UK but on the international stage.”

Complicating the negotiations is the fact that universities have a type of charitable status that means existing insolvency legislation doesn’t apply to them. That leaves lenders and borrowers unsure how to proceed. EY-Parthenon partner Caroline Pover, who has advised universities on refinancing, calls it “quite challenging.”

Further issues could emerge as nine universities are yet to file financial statements for the last academic year, and nine others expressed risks or uncertainties around their covenants, the Bloomberg analysis shows.

“Successive governments and successive ministers have always said there is no guarantee behind a university,” former universities minister and think tank Resolution Foundation President David Willetts said in an interview. “You cannot assume that if you’re making a commercial loan to a university, that is automatically guaranteed.”

The government has no plans at present to formally legislate an insolvency regime but is working with the regulator on a contingency plan to tackle the fallout from a larger university going bust, according to a Department for Education spokesman.

“Whilst institutions are autonomous, we remain committed to boosting the sector’s long-term financial sustainability and restoring universities as engines of opportunity, aspiration and growth,” the department said in a statement.

Much of the problem can be traced back to competition to grow enrollments, particularly from overseas, after a cap on student numbers at each institution was fully lifted from 2015. International students were attractive because they brought in additional money at a time when domestic tuition fees largely stayed frozen.Ambitions of luring more people from abroad to study, already hurt by Brexit and the pandemic, were dealt another blow last year when the former Conservative government barred most international students from bringing dependents with them. Annual sponsored student visa applications subsequently dropped 14%, Home Office data show. Soaring energy expenses and inflation also pushed up running costs, with more than 70% of UK universities at risk of posting deficits by 2026, according to the Office for Students, the sector’s watchdog.

Still, lending appetite remains strong for institutions whose reputations enable them to weather the overall downturn in student numbers. The competition to lend to good quality British institutions is “as fierce as I’ve ever seen it,” said NatWest’s Davison.

Winners and Losers

There will “be winners and losers in the long term,” said Elizabeth Cain, head of debt origination at Pension Insurance Corp., which has provided about £2.5 billion of lending to universities and student accommodation. “Some of the weaker institutions which maybe don’t have as good a global reputation, academic reputation or as strong a balance sheet will struggle,” she said, adding that PIC continues to lend to the sector.Small private colleges in the US have similarly struggled under declining student numbers, leading lenders to demand extra protection ranging from enrollment covenants to interest payments above 20%. Closures in the sector are likely to soar this year, Federal Reserve Bank of Philadelphia research forecast in December.Back in Swansea, the university had to pay £2.5 million this year to a private accommodation provider after occupancy didn’t meet pre-agreed levels. Inflation has also increased running costs and students are feeling the impact of cutbacks. Third-year student Jessica Waddington lost free access to a tutor who helped her manage her ADHD and dyslexia. Course-mate Abigail Basher’s sports team no longer gets provided with a bus to transport them to games.

“In common with much of the higher education sector, Swansea University is facing financial challenges as a result of falling international student numbers,” the institution said in a statement. “We have been proactive in tackling these challenges and are taking a number of measures in order to improve our financial sustainability.”

Brexit Woes

Brexit, in particular, has complicated the sector’s troubles. The European Investment Bank stopped new lending to universities after the UK voted to leave the European Union in 2016, but still has more than £2 billion of exposure to institutions. An EIB spokesperson said the bank’s approach to universities is pragmatic and no different to before Brexit.

“We all knew that across the higher education sector” times were “getting tougher, but I think the last couple of years have been a real shock” to the system, said Bell at the University of Sunderland. The college he runs has paid off its debt and has cut its budget by about 10% through measures such as putting up the price of parking and closing the workplace nursery. 

Back when he was at the Department for Education in 2006, he remembers wondering whether a minister might one day have to sign the death warrant for a university.

“One thinks about the political fallout of a university closing on your watch,” he said. “It’s going to be a big deal if it ever does.”

(Updates with details on US universities in second paragraph beneath Winners and Losers subheadline.)

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