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Higher education and the debt capital markets

Universities are increasingly raising capital from the public bond and private placement markets.

Last updated: 21 Jul 2020 6 min read

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Essex University’s Silberrad Student Centre.

  • Two of the most used ‘on- balance-sheet’ debt capital market funding options for higher education institutions are public bonds and private placements
  • Cambridge, Manchester, Leeds, Cardiff, Southampton and Oxford universities have all issued public bonds
  • A growing number of universities also using the private placement market to meet their funding requirements

Since 2006, the higher education sector has spent £27.9bn on developing and improving its physical infrastructure, according to figures published in October by the Higher Education Funding Council for England (HEFCE). HEFCE forecasts that borrowing will rise from £8.9bn at the end of 2015/16 to £11.7bn by the end of 2019/20. Against a challenging backdrop with reduced government funding, lower levels of funding available from the European Investment Bank (EIB) and traditional bank funding being provided on shorter tenors, the debt capital markets have provided a long-term, supportive investor base keen to match their long-term liabilities with long-term assets.

“Higher education institutions – predominantly the Russell Group of universities – have been accessing the institutional investor base for a number of years,” says Siobhán Duffy, head of private placements at NatWest Markets. “However, since 2014, following the UEA [University of East Anglia] debut private placement – the first for a non-Russell-Group university – that trend has begun to change. With growing investor demand for the UK education sector, the public bond and private placement markets have seen increased issuance from a wide range of universities.”

Market choices

On-balance-sheet debt capital market issuance from higher education institutions predominantly takes the form of public bonds and private placements. These institutional markets have capitalised on the lack of bank liquidity for longer-duration financing.

There are a number of key important distinctions between private placements and public bonds, pertinent for high-quality issuers, including tenor, structure and rating:

While there have now been six public bond issuances greater than £250m since 2012, increasing numbers of universities are opting for the private placement market.

“Private placements offer issuers a greater degree of flexibility around multiple tranches, a balanced maturity profile and access to capital markets for issuers targeting smaller notional amounts,” Duffy says. “Therefore, I believe the private placement market complements the public bond market and opens up more scope for greater numbers of educational institutions to borrow. Critically, public bonds and private placements are not competing products; we tend to find that size and the desire to obtain a credit rating are the biggest determinants, but not the only ones that issuers use when selecting their preferred market of issuance.”

Investors currently have a high demand for higher education transactions. The key drivers for this strong appetite include the strong and stable implied ratings and familiarity with the sector as well as its strategic importance to the UK. Investors are focusing more on current market themes and how universities respond to key sector challenges.

“I believe the private placement market complements the public bond market and opens up more scope for greater numbers of educational institutions to borrow”Siobhán Duffy, head of private placements, NatWest Markets

Preparation for both the public bond and private placement markets is critical for a successful transaction. Following the first base rate rise in November 2017, which may lead to further increases, the rate environment may start to become a higher priority for university treasury departments.

“They may take the view that now is a good time to borrow (pre-funding) or fix the cost of capital now (pre-hedging) in a conservative manner to risk-manage future borrowing requirements at levels they are comfortable with,” says Dominic Brindley, head of public sector at NatWest Markets. “We are seeing an increasing number of institutions consider whether either approach (pre-funding or pre-hedging) would be beneficial based on their funding requirements.”

First-class honours for the University of Essex’s debut private placement

Granted a Royal Charter in 1965, the University of Essex is an internationally renowned university located over three campuses in Colchester, Loughton and Southend-on-Sea. The institution is also proud to be listed as one of the top 25 universities in the UK.

“The university has seen a steady increase in the number of applications over the past five years,” explains Andrew Keeble, director of finance at the University of Essex. “To ensure the university could continue to provide an excellent learning environment, the decision was taken to access the private placement market. Following a competitive tender process we elected to mandate NatWest Markets.”

Keeble adds: “NatWest Markets was particularly effective in gaining an understanding of the strengths of the university and in presenting them to a wide range of investors. Furthermore, their arrangements for ensuring that all legal documentation was completed appropriately and efficiently worked exceptionally well.

“This is an important moment in the university’s history: securing low-cost funding for the refurbishment and expansion of its estate to meet the strong demand from applicants. It gives the university the means to continue to progress and fulfil its aim of delivering excellence in research teaching and in research by providing the high-quality facilities students and researchers expect and deserve.”

“It was a fantastic experience working with the University of Essex on its debut private placement,” says Sonia Gadhia, director, private placements, NatWest Markets. “This transaction highlights the benefit of having US and UK investors competing to achieve the best possible result for the university and firmly positions it to tap the capital markets.”

King’s teaches investors how to hit the books

Established in 1829, King’s College London has an illustrious history, with alumni including John Keats and Florence Nightingale. The institution is also listed as one of the top 20 universities worldwide.

“There is strong demand from high-quality students and we want our facilities to be competitive internationally,” says Stephen Large, vice president of finance at King’s College London. “With this in mind, we decided to raise £135m capital funding in the private placement market to redevelop the Strand Campus.

King’s Business School at King’s College London.

“Since the university’s foundation we’ve banked with the Royal Bank of Scotland, so we have a long and trusted relationship. Our shared history meant the bank was our natural first port of call in funding the Strand redevelopment. Following these discussions, NatWest Markets put forward an attractive proposal that would reduce the time to market by four to six weeks.”

The university next benchmarked NatWest Markets’ proposed financing solution with its advisers. “We were told it was very competitive,” continues Large. “That, alongside the strength of our existing relationship, the reputation of the bank in the higher education sector, and how impressed we were with the NatWest Markets private placement team, meant we quickly decided to go with them. The bank convinced us they knew which investors would be interested and how to target our requirements to get the most attractive offers from the market.”

“We were very privileged to work with King’s on its private placement,” says Gadhia. “The strength of the credit, coupled with very strong investor demand from UK and US investors, meant King’s was able to secure long-term funding at record low cost.”

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